Financial industry regulators release draft capital management measures categorizing institutional disclosure requirements by size. finews.asia looks at where things are headed.

A draft of China’s planned capital measure revisions was released to the world on Saturday. According to authorities, it is 400,000 words long and has 25 annexes, and it is expected to come into effect at the beginning of next year after a period of public consultation ending in March.

In other words, a very specific tome for a particular species of financial industry treasury specialist.

China’s central bank, the People’s of China (PBoC), released the draft jointly with the China Banking and Regulatory Commission (CBIRC), with both stating it was aimed at improving financial industry risk management while improving the quality and efficiency of banking services.

Peaceful Sleep

There are a few things that stand out from the way they have packaged it, with both appearing to stress to the media (Mandarin only) that the economic and market events of the last few years had left their mark on the wider industry.

Although this was a driving impetus behind the changes, they still want to keep the key principles behind the current capital measures introduced in 2012.

That means continued adherence to Basel Committee requirements and further market liberalization, something likely to keep senior managers of large international banks with significant mainland franchises sleeping relatively soundly.

Banks by Size

They will also maintain a so-called risk-based approach, an increasingly generic industry term that just means the largest risks should be monitored and managed more than others.

When it comes to capital adequacy ratios, the regime seems comparable to that in other significant banking jurisdictions although things get more interesting when they say they will start regulating banks by size. 

It seems to make a good deal of given the massively disparate nature and heft of the banks in the country, ranging from the world’s largest bank, The Industrial and Commercial Bank of China (ICBC), to tiny rural banks in the countryside.

Analyzed and Compared

The intent they both convey with the step is that by classifying banks and differentiating them according to capital requirements, risk-weighted assets, and similar factors, it will allow them to be analyzed and compared to other banks similar in size.

The first so-called group will be the largest banks. They are the ones that have large-scale, cross-border operations and they will be benchmarked the most closely against international capital supervision rules.

Smaller banks with fewer assets and little cross-border business will belong to the second group while the third group will comprise those with balance sheets of less than about 10 billion yuan ($1.5 billion).

That does not mean that capital requirements will be reduced for any of the banks in each of the groups, but that the compliance measures will be significantly simplified for those in the second and third groups, with the latter also directed to mainly focus on micro-lending and serving counties in China.

Real Estate Crisis

Both market and operational risk will see some adjustment, while credit risk will get the most significant overhaul given the deep property crisis of recent years, something that was most visibly exemplified by the Evergrande debacle, as finews.asia has extensively reported on (collated search results). 

Here the authorities will refine weightings for mortgage loans based on the type or property, repayment sources, and loan-value ratios, while limiting bank use of internal criteria and models.

As part of that, banks will also have to establish adequate credit management processes and systems.

Weighty Disclosure

But what does it all mean in practice? For a large bank in the first group, it means a good deal of evergreen, permanent reporting as the authorities intend to blanket them with 70 detailed disclosure templates specifying format, content, frequency, methods and quality controls. 

The second group will only need to provide eight of those types of statements while the smallest, the third group, will only need to provide two of them in relation to capital adequacy and composition.

While this is a welcome step, it also appears to mainly relate to capital management and solvency. 

Specific Requirements

In future, in the context of wider regulation, it would be a good idea to take a deeper look at the specific compliance requirements for each type of bank business and come up with rules that better reflect the characteristics of those businesses, such as has been implemented in some jurisdictions, even in Hong Kong.

Right now, Chinese-funded banks must meet the commercial bank law while overseas ones contend with foreign-funded bank regulation. 

Although that is largely the realm of regulatory compliance, it may potentially help the future domestic growth of specific industry niches, including that of the private banking industry.