How Basel III will change Chinese bank financing

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Chinese banks’ Basel III fears are mounting as lawyers outline how regulatory implementation of the rules will limit the industry’s financing options.

In June the China Banking Regulatory Commission (CBRC) issued its Regulation Governing Capital of Commercial Banks. The requirements stipulated are much higher than those specified under Basel II and Basel III.

Implementation of the regulation is expected to fundamentally change Chinese banks’ means of financing.

Eversheds’ Kingsley Ong said that due to an ongoing global financial crisis and fears of a slowing economy, Chinese banks had focused more on achieving larger capital buffers than on issuing new loans in the market.

Under the CBRC’s rules, China’s systematically important financial institutions (SIFIs) must maintain a capital adequacy ratio of 11.5% - one percent more than the 10.5% stipulated under Basel III. Other financial institutions must maintain a 10.5% capital requirement.

One Shanghai-based lawyer said local banks had used a lot of subordinate note offerings to satisfy their core capital requirements. But this activity would not qualify under Basel III principles.

The counsel also noted that CBRC regulations previously took account of 100% of loans to SMEs in a bank’s core capital.

“In the new regulations, the percentage has been reduced from 100% to 75% so that Chinese banks will be encouraged to make more loans to small or medium private enterprises, which is in line with the central government’s call to support the economy instead of the real estate or insurance markets,” he said.

Nonetheless, the lawyer conceded the CBRC had also given Chinese banks a 10-year transitional period to close non-qualified capital instruments. “This takes a lot of pressure off the PRC banks,” he said.

The CBRC may also allow Chinese banks to issue preferred shares in the future. This would be a new instrument in China.

  See International Financial Law Review for the full article, and for more bank reform coverage