CBRC chief says the large banks can lead the way in adopting the prescribed risk management practices China will encourage its three largest commercial banks to adopt the risk management practices prescribed by the new Basel capital accord, the country's banking regulatory chief said yesterday. Liu Mingkang, chairman of the China Banking Regulatory Commission (CBRC), yesterday urged the Bank of China, China Construction Bank and the Industrial & Commercial Bank of China (ICBC) to develop risk management practices based on the new accord's innovative internal ratings-based (IRB) system. 'In my view, if our large banks can demonstrate in the near future that their systems can meet Basel II standards, the objective of transforming state-owned banks into shareholding commercial banks with international competitiveness can be considered broadly achieved,' Mr Liu said at a capital markets and corporate governance conference in Beijing. Mr Liu also announced that foreign banks would be able to conduct local currency operations in five additional mainland cities, bringing the total number to 18. The new authorised cities are Beijing, Kunming, Xiamen, Xian and Shenyang. The latter two are being opened a year ahead of schedule in line with a policy to encourage foreign banks to set up presence in economically lagging regions. Foreign banking enterprises will be able to operate in all Chinese cites by end-2006, when China is set to fully open its banking sector to foreign competition in compliance with its World Trade Organisation commitments. Mr Liu's focus on Basel II accords is significant, given China's reluctance to adopt standards it says may not be wholly suited to Chinese conditions. In contrast to the 1988 Basel capital accord, which calls for banks to set aside in reserves eight cents for every dollar they lend, the new Basel capital accord published by the Bank for International Settlements in June allows banks to calculate credit risks and regulatory capital requirements using an internal system. For larger banks with more IT resources, the accord could mean the reduction and better allocation of capital through fine-tuning the risk weightings of lending to different clients. But the innovative scheme's adoption not only requires a fat IT budget, but reliable historical credit data as well. Worried about increasing capital requirements in an industry still struggling to meet the Basel I best practice, the CBRC in August last year said it would not subject mainland banks to the IRB requirement until well beyond 2006, the year G-10 countries start implementing the new guidelines Yesterday was believed to be the first time that Mr Liu publicly named and urged large mainland lenders to adopt the more sophisticated system under Basel II, although the industry watchdog had said that it would encourage all major Chinese banks with extensive overseas branches to move in that direction. By the end of this year, 21 mainland banks, accounting for about 44 per cent of Chinese banking assets, would have met the Basel I regulatory capital requirement, up from eight last year, Mr Liu said at a separate press conference in Beijing yesterday. The regulatory emphasis on capital adequacy led China's big four state-owned commercial banks and 12 nationwide shareholding banks to boost their combined core capital to 56 billion yuan in the first nine months. In the same period, the 16 banks' non-performing loan (NPL) ratio fell 4.39 percentage points to 13.37 per cent, Mr Liu said. ICBC, the country's largest commercial bank, expects its NPL ratio to fall to 3 to 4 per cent following financial restructuring, its president Jiang Jianqing said at the financial forum yesterday.