Tough times for small Chinese banks faced with Basel III compliance

Efforts to raise capital and enhance risk coverage at banks across the globe are proving tough for the mainland's small commercial lenders.

The mainland has 145 city commercial banks and more than 460 rural commercial banks. Most of them are pint-sized compared with a handful of listed banks and operate only within counties and cities, posing little risk of triggering a systemic crisis.

Still, the banks will have to follow along with at least the most basic requirements of the international banking standards known as Basel III, a push from the Bank for International Settlements and regulators the world over to dodge financial meltdowns and avoid public bailouts should banks go belly up.

The challenge for China's small commercial banks is that this is the first time they have been asked to boost capital on this level while also employing more sophisticated methods of calculating risk. "In a sense, these banks never really had Basel II," said Grace Wu, a senior director at Fitch Ratings.

Not all banks were required to participate in the last round of capital raising, which China implemented in 2004. At the time, the newly created China Banking Regulatory Commission asked only large banks with operations abroad to comply. Participation by other banks was optional.

Basel III, which at its most basic level requires banks to post an 8 per cent capital adequacy ratio, was formulated in the wake of the financial crisis in 2009 and has introduced a host of new risk weighting measures. But this time around, CBRC is pushing all of China's commercial banks to fall in line with a highly technical regime that experts say is putting pressure on the capacity of the risk management teams at small banks.

"The majority of the personnel in the small banks lack knowledge and expertise of assessing risks," said Spark Wang, a regulatory intelligence expert at Wolters Kluwer Financial Services in Shanghai.