No More ‘One Size Fits All’ Bank Reserves
Regulators are preparing to adjust capital adequacy ratios to meet the specific needs of small- to medium-sized banks in China.
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By Fang Huilei – Caijing Magazine
9 October 2008
Regulators are preparing to adjust capital adequacy ratios to meet the specific needs of small- to medium-sized banks in China.
Regulators plan to build flexibility into the capital adequacy requirements for small- to medium-sized banks in China, a source at the China Banking Regulatory Commission (CBRC) told Caijing.
The source, who asked not to be named, said a new standard would be implemented to replace the “one size fits all” approach that marks the current system.
Moreover, the Chinese regulator plans to more closely emulate international standards for bank reserves.
While the capital adequacy ratio for first-tier banks is now set at 8 percent or more, the source said CBRC in the future may enact specific requirements for each bank that reflect different situations.
The source said regulators do not want capital adequacy ratios to fall below 8 percent. Moreover, regulators have pledged to intervene when a bank’s capital adequacy falls for two consecutive months.
Earlier, CBRC official Chen Gangming said regulators hope to see a steady increase in capital adequacy over the next three years among small- to medium-sized banks.
By the end of this year, Chen said September 25, capital adequacy levels should rise to 8 percent. The ratios should climb to 10 percent next year, and reach 12 percent by 2010.
Risk control abilities vary from bank to bank, and the CBRC source said regulators recognize that a 10 percent capital adequacy may be insufficient for some banks with especially weak risk management. But banks in expansion modes should expect higher capital adequacy ratios to protect them from risks, the source said.
When faced with low capital adequacy ratios, Chinese banks typically issue bonds to raise cash. But regulators would rather see banks improve internal controls and, thus, reduce the need for fund-raising.
A fundamental objective of the regulatory demands for stable and high reserve ratios is to push banks to improve risk management.
“As regulators, we do not want to see banks simply, and all at once, raise capital, but to work on long-term strategic plans for capital adequacy,” the source said.
China’s banking law gives CBRC the authority to set flexible capital adequacy standards.