350,000 words heavy file release! The banking industry will usher in these changes.
China Business Daily (Reporter Ma Wenbo)On November 1, the State Financial Supervision and Administration Bureau issued the Measures for Capital Management of Commercial Banks (hereinafter referred to as the Capital Measures). The Capital Measures consist of a text and 25 annexes, totaling 350,000 words, further improving the capital supervision rules of commercial banks, promoting banks to strengthen their risk management level and improving the quality and efficiency of serving the real economy.
Constructing differentiated capital supervision system
The capital approach constructs a differentiated capital supervision system, which is divided into three grades according to the bank size and business complexity, matching different capital supervision schemes.
Banks with large scale or more cross-border business are classified as the first file, which is in line with the international rules for capital supervision; Banks with smaller scale and less cross-border business are included in the second file, and relatively simplified regulatory rules are implemented; The third file is mainly for smaller banks with no cross-border business, further simplifying the capital measurement requirements and guiding them to focus on county and micro-financial services.
Part of the Measures for Capital Management of Commercial Banks. (Image from the website of the General Administration of Financial Supervision)
The relevant person in charge of the State Financial Supervision and Administration Bureau said that differentiated capital supervision does not reduce capital requirements, but on the premise of maintaining the overall stability of the banking industry, it will stimulate the financial role of small and medium-sized banks and reduce the compliance costs of banks.
At the same time, the State Financial Supervision and Administration Bureau made it clear that before January 1, 2029, the first-class commercial bank group can separately disclose the subsidiaries in the group that do not meet the standards of the first-class commercial banks according to the second-class and third-class standards respectively. According to the Capital Measures, the first commercial bank group can measure the consolidated capital adequacy ratio, and the consolidated capital treatment method can be appropriately simplified before January 1, 2029.
The relevant person in charge of the State Financial Supervision and Administration said that the capital approach has improved the matching between capital supervision and the scale and business complexity of banks, and is conducive to reducing the compliance costs of small and medium-sized banks without relaxing the requirements of prudential supervision. At the same time, the capital approach will also strengthen the role of capital as a baton of resources, guide commercial banks to optimize and adjust their asset structure, and increase support for the real economy.
A business outlet of China Industrial and Commercial Bank. (Image courtesy of CNSPHOTO)
Strengthen industry risk management
The capital approach comprehensively revised the risk-weighted asset measurement rules, including credit risk weighting method and internal rating method, market risk standard method and internal model method, and operational risk standard method, to enhance the risk sensitivity of capital measurement.
The relevant person in charge of the State Financial Supervision and Administration said that risk weight is the cornerstone of maintaining the prudence of capital supervision. The setting of risk weight should objectively reflect the risk essence of off-balance-sheet business, so that the capital adequacy ratio can accurately reflect the overall risk level and sustainable operation ability of banks.
In February this year, the former China Banking and Insurance Regulatory Commission promulgated the Measures for Capital Management of Commercial Banks (Draft for Comment) (hereinafter referred to as the Draft for Comment). Compared with the exposure draft, the Capital Approach further calibrates the risk weight of some risks and optimizes the credit conversion coefficient applicable to individual off-balance-sheet businesses by combining the risk characteristics of related businesses.
In addition, the capital approach also lowered the risk weight of commercial banks’ exposure to residential real estate risks.
Article 71 of the Capital Measures proposes that the risk weight of the risk exposure that the repayment is not substantially dependent on the cash flow generated by real estate shall be 20% if the loan-to-value ratio is less than 50% (inclusive) in accordance with the prudential requirements specified in Part VIII (V) of Annex 2 to these Measures; 50% to 60% (inclusive), the risk weight is 25%; 60% to 70% (inclusive), the risk weight is 30%; 70% to 80% (inclusive), the risk weight is 35%; 80% to 90% (inclusive), the risk weight is 40%; 90% to 100% (inclusive), the risk weight is 50%; If it exceeds 100%, it shall be measured according to the counterparty risk weight.
The previous exposure draft stated that if the loan-to-value ratio is below 60% (inclusive), the risk weight is 40%; 60% to 80% (inclusive), the risk weight is 45%; 80% to 90% (inclusive), the risk weight is 70%; 90% to 100% (inclusive), the risk weight is 75%; If it exceeds 100%, it shall be measured according to the counterparty risk weight.
Compared with the draft for comment, the formal method increases the classification of situations from five files to seven files, and the division is more detailed; The risk weight of the same grade is also reduced by 25% or 30%.
In addition, the capital approach also lowered the weight of equity investment. The risk weight of passively held equity investment in industrial and commercial enterprises is reduced from 400% to 250% within the time limit prescribed by law.
Zhang Baoquan, director of risk business and general manager of risk management department of Shanghai Pudong Development Bank, said that the capital approach reduces the weight of real estate credit risk exposure to a certain extent compared with the exposure draft, which more reasonably reflects the objective level of mortgage value of real estate assets in China. The quality of China’s real estate mortgage loan assets is relatively good. According to the international standards, the capital requirements will not be significantly increased, which is still enough to fully cover the risks of related assets, which is conducive to enhancing the ability of banks to serve the real economy and increasing the support for small and medium-sized enterprises and consumer credit.
Reasonable setting of transition period
It is understood that the capital approach will be officially implemented on January 1, 2024, and a transition period has been set.
First, a two-year transition period is set for the loss reserves included in the net capital, during which the minimum requirements for loss reserves of non-credit assets are gradually raised, so as to promote commercial banks to increase their loss reserves reasonably and smooth the impact on the net capital.
The fixed income research team of CICC believes that this arrangement is in line with the transitional arrangement of the Measures for the Risk Classification of Financial Assets of Commercial Banks, which came into effect in July this year, and is conducive to the smooth transition of banks.
The second is to set a five-year transition period for information disclosure. During the transition period, commercial banks will apply different information disclosure requirements according to their grades, systematic importance and listing situation, carry out information disclosure work steadily, and steadily improve information transparency and market binding force.
According to the Capital Measures, for domestic systemically important banks, information disclosure should include at least 17 items such as salary, credit risk, market risk, operational risk and leverage ratio. For non-domestic systemically important banks (except third-tier commercial banks), the information disclosure shall at least include qualitative and quantitative information on risk management, key prudential supervision indicators and risk-weighted assets, capital composition and leverage ratio.
Wen Bin, chief economist of Minsheng Bank, believes that the introduction of capital measures will not bring great capital pressure to bank operations because of the full consideration of the impact on the stability of the overall capital adequacy level of the banking industry and the transitional arrangements to ensure the safe and orderly implementation.
At the same time, the State Financial Supervision and Administration put forward that all commercial banks should fully understand the significance of implementing the capital approach, do a good job in organizing and leading the implementation, formulate a clear and feasible implementation plan, clarify the division of responsibilities of relevant departments, and coordinate the allocation of resources to ensure the orderly implementation.
Song Lisong, deputy general manager of the Risk Management Department of CITIC Bank, said that the implementation of the capital approach is an overall, long-term and systematic work. In the next step, CITIC Bank will continue to consolidate and upgrade the implementation results of the new regulatory regulations, and take the implementation of the new regulations as an opportunity to do relevant work.
Wang Yong, general manager of the Risk Management Department of China Construction Bank, said that CCB will strictly follow the requirements of the Capital Measures, strengthen its operation and management capabilities, optimize its risk control and capital management system, carry out reporting and information disclosure in an orderly manner, and implement relevant requirements for the transition period to ensure the smooth transition and steady development of the whole bank.
Shi Wei, general manager of the Risk Management Department of Bank of China, said that BOC planned ahead of time and formulated the Implementation Plan for Advanced Capital Measurement Methods of Bank of China (2022-2025), aiming at ensuring compliance, improving management and striving for leadership, making overall plans for the implementation of the three pillars, and making preparations for the implementation of the capital measures in an orderly manner.
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