By King & Wood’s Finance Group

The China Banking Regulatory Commission (the "CBRC") issued Guiding Opinions of the China Banking Regulatory Commission on the Implementation of the New Regulatory Standards by the Chinese Banking Industry (Yin Jian Fa [2011] No. 44) (the "Guiding Opinion") on April 27, 2011, which clearly creates new rules for liquidity and capital held by banks in accordance with the "Basel Accord III" ("Basel III"), and on the basis of comprehensively assessing the effectiveness of the current prudent regulatory system, to improve the capital adequacy ratio, leverage ratio, liquidity, loan loss reserve and other regulatory standards. The four new regulatory standards for capital listed above will be implemented on January 1, 2012.


According to the Guiding Opinion, the CBRC continuously published Administrative Measures for Leverage Ratio of Commercial Banks (June 1), Administrative Measures for Loan Loss Provisions of Commercial Banks (July 27), then Administrative Measures on Commercial Banking Capital (Draft for comments) (August 12) and Administrative Measures on Commercial Banking Liquidity Risk (tentative) (Draft for comments) (October 12), to solicit public opinions. The four above administrative measures all provide for implementation from January 1, 2012.

The new regulatory standards are stricter than Basel III with respect to key regulatory indicators. The CBRC requires the tier 1 capital adequacy ratio to be not less than 5%, higher than Basel III’s requirement of 4.5%, which is the international standard. The CBRC requires commercial banking leverage ratios to be not less than 4%, higher than the 3% that is the international standard. With respect to requirements for loan loss reserves, the CBRC requires a new indicator of the "loan provision ratio" (the ratio of loan loss reserves to outstanding loans shall not be less than 2.5%), which places a great deal of pressure on many small and medium-sized banks.

According to the International Finance News this week, among the above four new regulatory standards, the CBRC may postpone implementation of the capital adequacy ratio, loan loss reserve and liquidity indicators, while the leverage ratio will be still implemented as planned. News of the decision was welcomed by the banking industry. Although this action can not be regarded as loosening the restrictions of regulatory policy, it provides adequate preparation for regulatory authorities, commercial banks and capital markets, which helps the successful implementation and smooth transition of the new regulatory policies. As to the extent of influence on the credit supply capacity of the banking system as well as on the macro economy, only time will tell.  (Written by Su Meng)