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Chinese banks embrace new Basel Accord
2003-06-02
China Daily
Chinese banks are increasingly following international standards when remodeling their risk management systems ahead of the industry's complete opening-up, but analysts say the task remains a major one.
The China Banking Regulatory Commission (CBRC) is planning to draft regulatory rules and operational guidelines to, "in line with the requirements of the new Basel Accord, establish a risk supervision system that fits national conditions," it said in a statement on May 29.
"We have long been studying ways to improve the existing capital supervision system," said Luo Ping, an official with the commission that was created in March to take over bank regulatory functions from the central bank.
Five Chinese banks participated in the latest quantitive analysis of the new Basel Accord's influence on banks and provided data to the Basel Committee on Banking Supervision (BCBS), Luo said. "The results will soon be distributed throughout the industry (in China)," he said.
The BCBS is soliciting comments from the international banking community on the third draft of an updated version of the Basel Accord, a globally applied bank risk management system that centers on an 8 percent minimum requirement of capital adequacy ratio (CAR).
The new Basel Accord, which the BCBS plans to finalize by the end of this year and is all "about improving risk management," Luo said, would hopefully lead to substantial progress in the risk management of Chinese banks.
Although the accord, which is largely meant for "internationally active banks," is not legally binding for Chinese banks, some of them are aggressively pursuing the even stricter rules of the new version as they strive to become internationally competitive players.
"It's not enforceable, but it matters when it comes to international co-operation, fund raising and credit rating," said Song Xianping, director of research with the Agricultural Bank of China. A strong CAR figure "represents the confidence you give to others."
The Industrial and Commercial Bank of China (ICBC), the country's largest State-owned commercial bank, is a forerunner.
In May it became the first Chinese bank to announce plans to apply the Foundation Approach, a lower level of the Internal Ratings-Based (IRB) Approach which is a core element of the new Basel Accord, in calculating its capital adequacy by 2006, when China is scheduled under World Trade Organization commitments to fully open up its banking sector to foreign capital.
The ICBC was part of a team organized by the central bank in 2001, when the first draft of the new Basel Accord was published, to examine its implications for Chinese banks. "Our overall understanding is - the new Accord provides an opportunity to improve risk management," said an ICBC official. "And the Industrial and Commercial Bank of China hopes to raise its risk management levels by meeting the requirements step by step."
It is surely a formidable task, not only for the ICBC, but all other Chinese banks. The ICBC, said to be among the best of its kind, had a core capital-based CAR of merely 5.46 percent, by the old Accord standards, at the end of last year, its 2002 annual report indicated.
Chinese banks now calculate their CARs with an amended version of the old Basel Accord.
Insiders said the numbers would be brought down by an average of some 2 percentage points when the new rules are used.
"The problem is very difficult to solve because the gap is just huge," said a senior banker who refused to be named. "It's not something that can be solved with 100 billion to 200 billion yuan (US$12 billion to US$24 billion)."
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