Basel III

China's banks fluid enough to meet liquidity challenge

However, even a diluted Basel rule will demand better risk management from mainland lenders in the longer term

PUBLISHED : Tuesday, 08 January, 2013, 12:00am
UPDATED : Tuesday, 23 January, 2018, 11:43am

It's a New Year gift to banks around the world.

Despite four years of grim warnings of tightening controls following the 2008-09 global financial crisis, central bank chiefs have agreed to water down and delay a planned bank liquidity rule crucial to safeguarding clients' money in times of crisis.

The so-called liquidity coverage ratio (LCR) forces banks to hold enough easy-to-sell assets to survive a 30-day credit squeeze.

The Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced on Sunday that the ratio requirement would not be fully enforced until 2019, four years later than expected. It also said that a wider range of assets, including some stocks and mortgage-backed securities, could be enlisted to meet the requirement.

It is the first time for a liquidity coverage indicator to be introduced into the global banking regulatory framework. Like the tougher new capital rules under the Basel III package, the liquidity rule is expected to have profound effects on the banking industry.

And mainland banks are no exception. It would not be difficult for most mainland banks to meet the requirement, but the introduction of the indicator would require better risk management skills in the medium to long term, which could be a challenge for Chinese lenders, analysts said.

"The Chinese Banking Regulatory Commission [CBRC] is studying how best to implement these new requirements in the China market, but it seems likely that they will apply, at least initially, only to the very largest banks," KPMG China partner Simon Topping said.

In response to calls from the Basel Committee on Banking Supervision, the CBRC issued a guideline to help banks with liquidity risk management in 2009 and a draft rule in 2011. Under the draft, lenders are asked to hold liquid assets to cover 30 days of net cash outflows.

The draft rule was to take effect this month, but the CBRC has yet to publish a final version.

Banks on the mainland largely manage their liquidity using traditional measures, including the loan-to-deposit ratio. The existing requirement is that banks' outstanding loans should be no higher than 75 per cent of their outstanding deposits at the end of every month.

"The traditional measures have served their purpose well and continue to be fine for most banks," Topping said.

One of the lessons of the global financial crisis, however, was that banks needed to ensure they were resilient during times of stress, including periods when liquidity was under pressure, he said. "Banks in China may have to make changes to their systems and liquidity risk management as a consequence, and this may take some time and effort," he said.

Jimmy Leung, banking and capital markets leader at PwC China, said: "The new requirement under Basel III is not a difficulty but a challenge to Chinese banks, which is a view shared by many bankers I've talked to."

Under the loan-to-deposit ratio system, banks often rush to meet the requirement at the end of each month by offering abnormally high interest to attract deposits or moving loans off their balance sheets, hardly the best practices for managing liquidity.