Banking

CARs may be raised if credit growth surges

By John Liu (China Daily)
Updated: 2011-01-29 10:00

BEIJING - China may order its biggest banks, including Industrial and Commercial Bank of China Ltd and China Construction Bank Corp, to raise capital ratios to as high as 14 percent when credit growth is judged excessive, said a person familiar with the matter.

Newly proposed rules would require banks to raise their capital adequacy ratios (CARs) by as much as 2.5 percentage points when the banking regulator determines credit growth to be excessive, said the person, who declined to be identified.

In normal credit conditions, lenders deemed systemically important will need to have a minimum 11.5 percent capital adequacy ratio, unchanged from the current requirement for China's biggest banks, said the person.

China is tightening oversight of banks in tandem with limiting mortgages and raising interest rates to prevent a record $2.7 trillion of credit, extended in the past two years, from inflating asset bubbles that may saddle its lenders with bad loans. Some banks may need to raise additional capital to meet the new requirements, the person said.

An official with the banking regulator's news department, who declined to be identified said a decision hasn't yet been made on proposed rules for capital ratios and that the process is still ongoing.

Under the China Banking Regulatory Commission's proposed rules, systemically important banks will have to comply with the new capital ratio requirements by the end of 2013, three years earlier than other lenders, the person said. China's five biggest banks, which also include the Agricultural Bank of China Ltd, Bank of China Ltd and Bank of Communications Co, are currently deemed systemically important, the person said.

All banks would be required to have a capital adequacy ratio of at least 8 percent, plus an additional 2.5 percentage points as a buffer during normal credit conditions, the person said. Systemically important banks would need to have a ratio that's an additional percentage point higher, the person said.

During periods when credit growth is excessive, the regulator will require all lenders to increase their ratios by as much as 2.5 percentage points, the person said.

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An earlier version of the rules would have required China's biggest banks to have capital adequacy ratios in a range from 11 percent to 15 percent by the end of 2012, a person with knowledge of that proposal said in September. That compares with ratios from 11.5 percent to 14 percent stipulated by the new proposed rules.

Systemically important banks will also need to have bad-loan provisions that are no less than 2.5 percent of total outstanding credit by the end of 2013, or 150 percent of non-performing loans, whichever indicator is higher, the person said. Other lenders with relatively strong profitability should meet the requirement by 2016, the person said.

Initial assessments show that the new rules won't have any major impact on bank lending or the nation's economic growth in the near term because most lenders are currently capable of meeting the requirements, the person said.

Bloomberg News