Banking Commission Announces Stricter Rules on Bank Capital

The China Banking Regulatory Commission (CBRC) announced new regulations on capital adequacy on February 27 in a bid to enhance risk management of the banking sector.

Under the stricter new regulations, which took effect on March 1, Chinese commercial banks will have even lower capital adequacy ratios than the figures calculated under existing rules, the Commission said. To give commercial banks more time to replenish their capital base, the Commission has set the deadline for meeting the new requirements at January 1, 2007.

"During the transitional period, commercial banks that fail to meet the requirements must formulate workable capital replenishment plans, and the China Banking Regulatory Commission will supervise the implementation and take regulatory measures accordingly," a Commission spokesperson said.

Most of Chinas commercial banks fail to meet the 8 percent minimum requirement for capital adequacy even under the older rules, which stands as a major obstacle hindering their reform efforts.

Under the new rules, the capital adequacy ratio-capital divided by risk-weighted assets-is calculated after a full deduction of bad loan provisions. Banks are required to fully set aside reserves only after 2005.

The rules allow the Commission to give differentiated regulatory treatments to banks with different capital adequacy levels. The commission can take over or urge for restructuring of banks with  seriously low capital adequacy ratios.