A new regulation on capital adequacy standards for commercial banks will be introduced this year, the China Banking Regulatory Commission (CBRC) announced yesterday.

The regulation, the first of its kind, will be based upon the 1988 version of the Basel Accord, the international banking industry's regulatory benchmark. But it will also draw on a new version of the accord that is expected to be finalized by the end of this year, it said.

The regulation will retain an 8 per cent minimum capital adequacy ratio requirement, but will also include requirements for supervision and information disclosure, two extra elements in the new accord.

The accord is only binding for "internationally active" banks in 10 developed countries, but is used by banking regulators worldwide as a reference.

Most Chinese banks would find it difficult to meet the 8 per cent requirement. Insiders said the new accord, which generally has stricter rules on the calculation of risk-weighted assets, may decrease their capital adequacy ratios by an average of 2 percentage points.

The banks are seeking ways to raise the ratio, their key barometer of risk management capacity. They have lobbied the government for a recapitalization as well as bond issuances, but have made little progress so far.

"Our continued use of the old accord is based on the reality in China," a CBRC spokesman said in a statement.

Implementing the new Basel Accord in China now is unlikely to considerably enhance its management of risk, but will push up capital requirements for the country's banking industry, he said.

The commission said China will not consider applying the new accord by the end of 2006, its implementation date in the 10 developed countries. But China will embrace the accord as an opportunity to improve risk management in its commercial banks.

"The new capital accord will provide our banking industry with a new look and new opportunities," the spokesman said.

Major Chinese banks have started building risk management systems in compliance with the new accord, and smaller banks are also actively seeking input into the new accord.

"Considering that only part of the Chinese banking industry has started implementing the five-category loan classification system (an internationally accepted loan classification method), the propensity among commercial banks to actively use the new accord for reference and to improve risk management is encouraging," the spokesman said.

The spokesman said the new accord may cause "negative impacts" on capital flows in developing countries. He said it also may put emerging market commercial banks, especially their overseas branches and affiliates, at a competitive disadvantage, but did not elaborate.

(China Daily August 15, 2003)