October 20,2008

China Implements Basel II Ahead of schedule

By Ma Wenluo
 

While governments around the world fret about their banking sector’s bad debts and banks here and there fall or are nationalized, the Chinese government has announced that it will further push banks into the market to compete. The China Banking Regulatory Commission (CBRC) last week issued the first batch of supervision regulations under Basel II (the Basel Capital Accord), including

IBR (Internal Rating Based Approach), which is relative to calculation of CAR (Capital Adequacy Ratio), other calculation rules, technical standards, and regulatory requirements.

CBRC announced last March that from the end of 2010 domestic banks should operate under Basel II, issued by the Basel Committee on Banking Supervision, but, in a display of self-confidence, the new banking guidelines have been implemented a year early, on October 10 this year, an ambitious initiative, for China is coming under Basel II a year earlier than the United States. The US postponed its own Basel II implementation for its large-scale banks until 2009.

Basel II, which superseded Basel I in 2006, stresses three core principles: Lowest Capital Requirement, Supervisory Oversight, and Market Discipline and Disclosure. Actually, Basel II is completely applicable only to dozens of "internationally active banks" of the G-10, because most of the risk measurement methods proposed by Basel II, for example, how to deal with securitized assets, and the deduction of a high degree of secondary securities from capital, are designed mainly for large international banks,. It is internationally active banks that hold a large number of securities. A decline in their credit rating can lead to an increase of risk assets and decline of Capital Adequacy Ratio, giving rise to liquidity crisis, even to the dilemma of government providing full deposit protection. Risk management deficiencies in internationally active banks aggravate the turmoil in global financial markets induced by subprime loan crisis. While people denounce concealment of information by greedy financial institutions, they also strongly condemn the U.S. financial institutions, regulatory authorities and the lack of disclosure, and the un-mplementation of Basel II by the US government.

After China's accession to the WTO, the government feared the competition its domestic banking sector faced from foreign counterparts. At that time, China's banking capital adequacy ratio was less than the 8% regulated by Basel I, bringing comments from the foreign media that China's banking sector was technically insolvent.

China then began to carry out reforms in the banking sector, stripping non-performing assets, injecting huge amounts of its foreign exchange reserve, attracting foreign investment banks as strategic investors at low prices, and urging banks to go public. With the rapid growth of China's economy, the banking industry has been invigorated. After its smooth 5-year protection period, China’s banks have launched overseas investments and established branch offices with their huge surplus of capital.

Although Beijing had announced the postponement of Basel II implementation, CBRC solicited opinions on Basel II in April 2003, a month after its establishment. China’s position outside the fiercer and fiercer subprime loan crisis and credit crunch is largely due to its relatively closed financial system. However, the overseas investments of Chinese banks have lost heavily, exposing weak risk management. This forced China to speed up the implementation of Basel II, requiring banks to install prudent management in order to enhance their international competitiveness. Now Beijing considers its own large-scale banks qualified as internationally active banks and more stringent regulatory standards should be implemented.

The train of China’s economy is running forward on its own-established tracks. The Chinese people have doubt on uncontrolled market and also hate completely-controlled economy by the government. Now they are combing the two together in a skillful way.

 

 

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