Tuesday, September 21, 2010

Could China be ahead of the curve on Basel III?

In the wake of the announcement of the Basel III standards, there have been numerous calls that the standards are too relaxed (see comments here, here, here and here).

Last Friday, the following statement appeared on the PBoC website on the topic of banking in China:

Bank lending is concentrated on local government financing vehicles, the infrastructure sector and big corporations. With the speeding up of structural economic adjustments, there is clearly a rising possibility of loan losses. The quality of loans to the property industry is currently still sound. But we need to be on high alert as to the impact of property price fluctuations on such loans. The NPL ratio of credit card loans is rising rapidly and the potential risks demand attention. By the end of 2009, bad credit card loans reached 7.8 billion yuan, up from 3.5 billion yuan a year earlier. The NPL ratio of such loans stood at 2.8 percent.
...but banks continue to have a dual mandate
Banks should continue to support exporters to help a recovery in exports and support domestic firms venturing abroad. Banks need to increase recapitalisation efforts and replenish their core capital base via retained earnings and fresh injections of capital from shareholders.
...and they expect to implement Basel III:
China will restrain the blind expansion of banks by implementing stricter capital requirements in line with the Basel Accord. China will open up the banking sector in a timely manner and actively attract foreign financial firms that will help the country to better serve small businesses and agriculture and to boost domestic consumption.
If official government policy is that the banking system is to support "a recovery in exports and support domestic firms venturing abroad" and the banking system is fragile, then something must be done to ensure that banks don't drag the system down. There was also a Bloomberg story that China may impose a 15% capital ratio for the biggest banks.

Is China ahead of the curve on this?

No comments: