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China looks before it leaps in global banking reform
By Simon Topping |
February 29, 2012, Wednesday
|
Print Edition
Print Edition
THE China Banking Regulatory Commission (CBRC) received plaudits when it announced early last year that Chinese banks would fully implement, on an accelerated timetable, the "Basel III" package of capital and liquidity reforms designed to strengthen global financial stability.
However, toward the end of the year, there were some questions raised as to whether implementation was being postponed in the face of opposition from the banking industry and concerns about the economic environment. So where does this leave us?
The answer is that China is still very much intending to implement Basel III. However, it is highly likely that the proposed implementation plan, which was more aggressive than the minimum requirements of Basel in terms of the timetable and other details, will now be brought more into line with what we are seeing elsewhere.
The key change we can expect is that the proposed implementation timeline for the new capital requirements - the end of 2013 for the big banks and the end of 2016 for others - seems likely to be extended so that they harmonize with the end of 2018, as specified by Basel.
This would be welcomed by the banks, giving them more time to come into line with the new requirements. It should also be good news for the economy amid a concern that too rapid implementation of higher capital and liquidity requirements could reduce banks' ability to lend and hence choke off the financing the economy needs to grow.
The proposals also seem likely to be modified in some other respects where they were somewhat tougher than required under Basel III, including the areas of the core Tier 1 capital ratio and the leverage ratio.
The Basel requirements, which represent the international standards in the field of banking supervision, are developed by the Basel Committee on Banking Supervision, a grouping of 27 national supervisory bodies. China became a member in 2009.
Going soft?
Questions remain. Is China having second thoughts about Basel III? Are Chinese banking regulators going soft on the banks?
No, if anything, this process shows just how sophisticated China is becoming in its approach to financial regulation. The banking regulator is adapting its proposals in the light of recent developments and in response to feedback from consultation.
The aim is to arrive at an approach that meets international standards, but also is right for China.
However, there is an additional complication here.
Since the China Banking Regulatory Commission issued its original proposal, Basel has come out with additional guidance in respect of the world's largest banks - the so-called "Global Systematically Important Banks."
This obliges the regulators of such banks, which include one Chinese mainland lender - the Bank of China - to consider the application of a range of additional requirements, including additional capital and the production of a "Recovery and Resolution Plan" in case the bank gets into difficulty.
Strong and efficient
The China banking regulator needs to consider, therefore, how to apply these new requirements and whether they should apply only to the Bank of China or to a wider group of major banks, thereby maintaining a level playing field. This seems likely to further delay publication of the final version of the requirements by the Chinese banking regulator.
But there is a more fundamental question to be answered: Is Basel III "right" for China in any case?
Some argue that the China market is at a different stage of development from other major markets and that "Chinese characteristics" mean that international standards and approaches may not be appropriate.
But the fact is that Chinese banks are rapidly developing and globalizing, and there is still much benefit to be drawn from learning from the experience and practices of Western banks.
Adopting international standards is an aid to Chinese banks in enhancing their capital and liquidity management, their risk management, their corporate governance and their business models.
This is in order to strengthen the ability of the banks in China to continue to finance the growth of the Chinese economy. The new standards can help make the banks stronger, more efficient and more resilient to stress.
So don't be fooled into thinking that a bit of delay in finalizing the details means that China is any less committed to implementing Basel III and other aspects of the international financial reform agenda. On the contrary, it's a central part of the strategy for the continuing development and strengthening of the banking sector.
Simon Topping is head of the KPMG Financial Services Regulatory Center of Excellence for the Asia-Pacific region. He is also a former executive director of the Hong Kong Monetary Authority.
However, toward the end of the year, there were some questions raised as to whether implementation was being postponed in the face of opposition from the banking industry and concerns about the economic environment. So where does this leave us?
The answer is that China is still very much intending to implement Basel III. However, it is highly likely that the proposed implementation plan, which was more aggressive than the minimum requirements of Basel in terms of the timetable and other details, will now be brought more into line with what we are seeing elsewhere.
The key change we can expect is that the proposed implementation timeline for the new capital requirements - the end of 2013 for the big banks and the end of 2016 for others - seems likely to be extended so that they harmonize with the end of 2018, as specified by Basel.
This would be welcomed by the banks, giving them more time to come into line with the new requirements. It should also be good news for the economy amid a concern that too rapid implementation of higher capital and liquidity requirements could reduce banks' ability to lend and hence choke off the financing the economy needs to grow.
The proposals also seem likely to be modified in some other respects where they were somewhat tougher than required under Basel III, including the areas of the core Tier 1 capital ratio and the leverage ratio.
The Basel requirements, which represent the international standards in the field of banking supervision, are developed by the Basel Committee on Banking Supervision, a grouping of 27 national supervisory bodies. China became a member in 2009.
Going soft?
Questions remain. Is China having second thoughts about Basel III? Are Chinese banking regulators going soft on the banks?
No, if anything, this process shows just how sophisticated China is becoming in its approach to financial regulation. The banking regulator is adapting its proposals in the light of recent developments and in response to feedback from consultation.
The aim is to arrive at an approach that meets international standards, but also is right for China.
However, there is an additional complication here.
Since the China Banking Regulatory Commission issued its original proposal, Basel has come out with additional guidance in respect of the world's largest banks - the so-called "Global Systematically Important Banks."
This obliges the regulators of such banks, which include one Chinese mainland lender - the Bank of China - to consider the application of a range of additional requirements, including additional capital and the production of a "Recovery and Resolution Plan" in case the bank gets into difficulty.
Strong and efficient
The China banking regulator needs to consider, therefore, how to apply these new requirements and whether they should apply only to the Bank of China or to a wider group of major banks, thereby maintaining a level playing field. This seems likely to further delay publication of the final version of the requirements by the Chinese banking regulator.
But there is a more fundamental question to be answered: Is Basel III "right" for China in any case?
Some argue that the China market is at a different stage of development from other major markets and that "Chinese characteristics" mean that international standards and approaches may not be appropriate.
But the fact is that Chinese banks are rapidly developing and globalizing, and there is still much benefit to be drawn from learning from the experience and practices of Western banks.
Adopting international standards is an aid to Chinese banks in enhancing their capital and liquidity management, their risk management, their corporate governance and their business models.
This is in order to strengthen the ability of the banks in China to continue to finance the growth of the Chinese economy. The new standards can help make the banks stronger, more efficient and more resilient to stress.
So don't be fooled into thinking that a bit of delay in finalizing the details means that China is any less committed to implementing Basel III and other aspects of the international financial reform agenda. On the contrary, it's a central part of the strategy for the continuing development and strengthening of the banking sector.
Simon Topping is head of the KPMG Financial Services Regulatory Center of Excellence for the Asia-Pacific region. He is also a former executive director of the Hong Kong Monetary Authority.
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