China will build a differentiated capital regulatory system for commercial banks, dividing them into three tiers based on their total assets and risk profile, and matching them with different capital regulatory programs, said the China Banking and Insurance Regulatory Commission.

On Saturday, the CBIRC issued the draft for comments on the administrative measures for the capital of commercial banks in conjunction with the People's Bank of China, the country's central bank.

The CBIRC said revisions were made to the current administrative measures, which were rolled out in 2012, to further improve commercial bank capital regulations, promote banks to enhance their risk management capabilities, and improve the quality and efficiency of banks to serve the real economy.

Banks with a large asset size or relatively larger cross-border business are classified as Tier 1, and the capital regulatory measures for them will be in line with international rules. Tier 1 banks are required to disclose a complete set of reports, in order to enhance risk information transparency and market discipline.

Banks with relatively smaller asset and cross-border business sizes are classified as Tier 2. They are subject to relatively simplified capital regulatory measures and disclosure requirements, according to the CBIRC.

Banks with assets of less than 10 billion yuan ($1.46 billion) each are classified as Tier 3. The CBIRC said it will further simplify capital measurement for Tier 3 banks and guide them to focus on serving the county economy and small businesses.

Once implemented, the revised administrative measures will help improve the risk management level of banks in China, maintain the stability of the banking system, and better prevent financial risks, said Dong Ximiao, chief researcher at Merchants Union Consumer Finance Co. 

The new regulations will put differentiated supervision on bank capital into practice, lower compliance costs for small and medium-sized banks, and improve banks' ability to serve the real economy, especially by reducing the capital occupation of local government bonds and high-quality enterprises.

The new regulations will also help China's banking sector to align with international rules such as the Basel III Accord, and promote the continuous expansion and deepening of the financial industry opening-up in China, Dong said.

The Basel Committee on Banking Supervision, the primary global standard setter for the prudential regulation of banks, has been pushing forward regulatory reforms in response to the financial crisis of 2007-09, issuing a series of prudential regulatory requirements as the minimum capital regulatory standards which apply to internationally active banks.

The CBIRC revised the administrative measures for the capital of commercial banks based on the actual situation of China's banking sector and the latest achievements of international regulatory reforms. This will help banks to continuously improve the precision of risk measurement and guide them to better serve the real economy, said an official with the CBIRC in a written reply to media questions. The reply was published on the regulator's website on Saturday.

It is projected that after the revised administrative measures are implemented, the overall level of capital adequacy in the Chinese banking sector will remain stable without significant fluctuations. However, the capital adequacy ratios of individual banks are estimated to change slightly due to differences in asset types, reflecting the requirements of differentiated supervision, the official said.

The new regulations are scheduled to be officially implemented on Jan 1, 2024, with sufficient transitional time for commercial banks, said Dong with Merchants Union Consumer Finance.

However, financial regulators should minimize the impact of overlapping regulatory requirements on China's banking sector by fully considering factors such as additional capital requirements for global and domestic systemically important banks, leverage ratio requirements, and countercyclical capital buffer requirements, he said.

At the same time, efforts should be made to accelerate the establishment of a long-term mechanism for commercial banks to replenish capital so that they can meet the new regulatory requirements as soon as possible. Financial regulators should also strengthen coordination and continue to support replenishment of bank capital, he said.