Chinese Banks: New Capital Management Rules

Karen Wu, CFA – Analyst - Asia-Pacific Banks

EXECUTIVE SUMMARY
  • Chinese regulators released a proposal to amend the current capital management rules of commercial banks; a draft amendment (the “new rules”) has been released for public feedback till 20 March 2023 and will be put into effect from 1 January 2024.
  • The new rules will divide commercial banks into three groups based on adjusted on-and-off balance sheet assets and overseas claims and debt; the three groups will face different requirements for capital ratios, risk weights and disclosure.
  • The first group and the second group will face the same set of capital ratios and risk weights requirements, but the first group of banks are required to make more detailed and comprehensive disclosures regarding capital and risks.
  • The third group will consist of small county-level banks that do not have an overseas business; these banks will have lower capital ratio requirements, a simpler risk weights mechanism, and limited disclosure requirements in order to reduce their capital measurement burden and allow them to focus on serving SMEs and local economies.
  • The new rules will relax the RWAs on corporate exposure and continue to encourage banks to increase lending to SMEs.
  • Credit card RWAs for banks on the standardised measure will be lowered from 75% to 45%.
  • The new rules have a separate set of RWA requirements for property exposure which are stricter than the existing rules, indicating Chinese authorities’ continued focus on property risk.
  • The new rules will lower the risk weight for general local government bonds to 10% from 20%, but keep that for specific local government bonds at 20%.
  • The risk weights on domestic commercial bank exposures will be increased from 25% to 30-150%, subject to specific ratings, which we believe is to make Chinese banks cognizant of inter-bank systemic risks.
  • The new rules will also increase the risk weight on banks’ subordinated bonds from 100% to 150%; the latter risk weight will also be applicable for senior TLAC bonds.
RELATIVE VALUE

One week after the release of new rules for commercial banks’ financial assets risk classification, Chinese regulators released a proposal to amend the current capital management rules of commercial banks; a draft amendment (the “new rules”) has been released for public feedback till 20 March 2023 and will be put into effect from 1 January 2024.

Overall, we view the proposed amendments to the capital management rules as a continuation of Chinese authorities’ focus on controlling property risk, supporting SME lending and encouraging credit card lending to stimulate consumption. The major banks will be required to follow a stricter disclosure requirement which is good, but we also note that the banks under our coverage have already met a majority of the disclosure requirements. That said, we think the stricter RWA requirements on exposures to domestic banks will help to limit inter-bank systemic risks. The Chinese banks already have relatively low risk weights for credit card usage so a further lowering of these weights is surprising to us. There is also a relatively generous definition of ‘investment grade’, which will allow companies which would otherwise be (local currency) high yield to be classified as IG with a lower risk weight.

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