Basel III: Chinese banks saving for new capital adequacy ratio

August 26, 2011

By Helen H. Chan

HONG KONG, Aug. 26 (Business Law Currents) – New capital adequacy rules from the China Banking Regulatory Commission (CBRC) are prompting banks to hit up investors in Hong Kong and Shanghai’s capital markets. Part of the Basel III implementation process, the rules will require Chinese lenders to shore up additional capital to protect against credit risks.

Under the new rules, which are currently open to public review, systemically important banks in China will be subject to a minimum capital adequacy ratio (CAR) of 11.5 percent; other banking institutions will be required to adhere to a minimum CAR of 10.5 percent.

As reported by Reuters, the weighted average CAR among PRC banks was 12.2 percent at the end of June 2011, suggesting that banks in China should not be in a rush to raise funds since they already meet the minimum requirement under the new rules.

In a more conservative view, however, the core CAR of Chinese banks was 9.92 percent at the end of June. According to a mid-term capital management report from China Merchants Bank (CMB), China’s sixth-largest lender by market value, banks should prepare for rainy days ahead. CMB recently remarked that banking businesses in China are being “confronted with serious risks.”

Areas to watch out for include real estate loans extended to developers in China, loans made to government financing vehicles and, in particular, off-balance sheet credit business. While certain off-balance sheet items may be included in a bank’s risk weighted assets, repackaged loans that are moved off a bank’s balance sheets remain problematic as they can potentially understate a lender’s risk exposure to bad loans.

In an effort to create a buffer zone for the new rules, as well as guard against risks, a number of mid-sized banks are bolstering their balance sheets. Earlier this summer, China Citic Bank Corporation Limited (CCB) issued 7.8 billion new shares in a dual Shanghai-Hong Kong rights issue, raising US$4 billion in total. Proceeds from the transaction were used to strengthen the bank’s capital base. Calvin Lai and Richard Wang of Freshfields Bruckhaus Deringer advised CCB on the rights issue.

Last week leading Chinese insurer Ping An Insurance announced plans to funnel funds to its majority-owned banking unit, the Shenzhen Development Bank Co Ltd. According to Reuters news sources, the cash injection is the second contribution in less than one month and is likely to range from RMB$10 billion to RMB$20 billion (US$1.56 – 3.12 billion).

Recently, CMB disclosed plans to raise up to RMB$35 billion (US$5.4 billion) in a Hong Kong and Shanghai rights issue. According to a notice filed with the Hong Kong Stock Exchange, CMB will issue up to 2.2 shares for every 10 of its existing shares. According to Reuters news sources, CMB’s CAR stood at 10.91 percent earlier this year, just above the regulatory minimum of 10.5 percent.

In addition to rights issuances in Hong Kong and Shanghai, Chinese banks are also waiting in the wings to launch dual-listings. This month, China’s Guangfa Bank disclosed that it was waiting for a “good window” to launch its RMB$35 billion (US$5.5 billion) IPO in Hong Kong and Shanghai. Partially owned by Citigroup Inc, the bank initially planned to list in the third quarter of this year. Similarly, China Everbright Bank, which recently delayed its RMB$6 billion (US$937 million) HK IPO for the second time in two months, is also hoping to beef up its capital base.

Faced with stricter capital adequacy requirements, even large systemically important lenders in China are feeling the pressure to guard against credit risks. Earlier this summer the Agricultural Bank of China (AgBank) completed an issuance of RMB$50 billion (US$7.8 billion) subordinated bonds on China’s national inter-bank bond market. According to a statement released by AgBank, proceeds from the issuance will be used to replenish the bank’s subordinated capital.

The new capital adequacy rules are expected to come into effect next year. China’s CBRC has said that major banks will be required to meet the new requirements by the end of 2013, while small to mid-sized lenders have until the end of 2016. Ahead of the deadlines, Chinese banks have already begun to save for a rainy day that is well on its way.

As reported by Reuters, large-scale fund-raising by Chinese banks in response to enhanced capital adequacy requirements has played a large role in dampening PRC capital markets. Combined with an increasingly dim outlook for stock markets around the world, Chinese lenders might not be able to bank on bourse fund-raising for much longer.

(This article was first published by ThomsonReuters’ Business Law Currents, a leading provider of legal analysis and news on governance, transactions and legal risk. Visit Business Law Currents online at )



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Shouldn’t we talk about the CAR of Western banks, which is still THREE percent?

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On 15 August 2011 the China Banking Regulatory Commission (CBRC) released new draft guidelines regarding commercial banks’ capital requirements.

The draft guidelines set out how China aims to comply with the higher capital standards set by Basel III.

The draft guidelines set out the new, layered, capital adequacy requirements:

1. “Minimum capital requirements” for all banks: Tier 1 capital adequacy requirement of 6% (of risk weighted assets), of which 5 percentage points must be “core” Tier 1 capital; and combined Tier 1 and 2 capital adequacy ratio of 8% (of risk weighted assets)

2. In addition all banks will be required to keep a “capital conservation buffer” of 2.5%

3. systemically important banks are required to hold an additional 1% of capital; that gives a total minimum capital adequacy ratio under “normal conditions” of 11.5% for systemically important banks, and 10.5% for non-systemically important banks

4. In addition the regulator will impose an additional “countercyclical buffer” of between 0 – 2.5% during times of excessive credit growth.

George Lekatis

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