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‘‘Liquid Assets/ (Deposits and Short-term Funding)’’ is a deposit run off ratio and looks at what percentage of customer and short term funds could be met if they were withdrawn suddenly, the higher this percentage the more liquid the bank is and less vulnerable to a classic run on the bank. By 2008 CCB had lowest figure around 5% but the ratio up nearly 19% to 24.8% in 2009; nevertheless, in the same year ABC had the highest of 26.36% among SOCBs.
2.6 Compliance with Basel II
In 1974 several international banks in the United States, United Kingdom, and Germany went bankrupt one after another due to poor supervisory regulations, for this reason Bank for International Settlements (BIS) gave support to establish the Basel Committee on Banking Supervision (BCBS) in 1975.21
Basel Capital Accord (Basel I) was proposed by BCBS in 1988, which set up the standard of minimum capital requirement of 8% Capital Adequacy Ratio (CAR) and 4% of Core Capital Adequacy Ratio (Tier 1 ratio).
22
As the first banking international regulatory cooperation agreement, Basel I contained many drawbacks and it was not complete enough for developing countries to set up perfect provision system. As a result, BCBS decided to revise Basel I and then promoted the New Capital Accord (Basel II) in June of 2004; all member countries were required to implement Basle II by 2006.
The fundamental objectives of Basel II are to further strengthen the soundness and stability of international banking system while maintaining sufficient consistency that capital adequacy regulation will not be a significant source of competitive
21 BCBS consists of senior representatives of bank supervisory authorities and central banks from Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Spain, Sweden, Switzerland, the United Kingdom, and the United States.
22 Capital Adequacy Ratio is often referred as ‘‘BIS ratio’’ internationally.
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inequality among internationally active banks and promote the adoption of stronger risk management practices by the banking industry.
In order to fulfill above-mentioned objectives, Basel II introduces three pillars, the first pillar completed the minimum capital requirement of Basel I, the second pillar and the third pillar represented innovation of capital regulation, the essence of each pillar are described as below:
1. Pillar I—Minimum Capital Requirement: Basel II improves the minimum capital standards in Basel I in order to ensure that banks have sufficient capital to against risk.
2. Pillar II—Supervisory Review Process: Supervisory Commission and Authorities monitor internal control procedures of financial institutions, such as CAR, in order to ensure the full implementation of risk management.
3. Pillar III—Market Discipline: Standardize various reporting statistics and information of financial institutions so that the public can monitor the common risk of banks’ operations.
Before CBRC became a member of BCBS in 2009, it already announced〈The Guidelines on the Implementation of the New Basel Accord by China’s Banking Sector〉on February 28, 2007 and set up timetable for China banking industry to gradually adopt Basel II.
However, the implementation is not compulsory for every commercial banks in China, only large banks with operational entities in foreign countries or regions including Hong Kong, Macao and Taiwan or with large proportion of international business should adopt Basel II; commercial banks with above-mentioned qualifications are named by CBRC as ‘‘Basel II banks’’, and every SOCB conforms to the criteria.
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Table 2-18 is the timetable of Basel II implementation in China which could be separated into following three stages.
Stage I: The year 2008 was the preparation period for Basel II implementation in
China. During this period CBRC issued relevant supervisory rules and amend the existing capital regulation requirements according to current financial situation and banking development level.Stage II: The year 2009 was the policy testing period; CBRC conducted
Quantitative Impact Study to evaluate the impact of implementing Basel II on China banking industry.Stage III: Overall Basel II implementation in China’s banking industry is
scheduled to commence in the beginning of year 2010, but with the approval from CBRC, Basel II banks can extend deadline of adoption to the end of year 2013. As for other non-Basel II banks, they may voluntarily propose an application to CBRC for the implementation of Basel II by going through the same procedures as the Basel II banks do after year 2011.Although till now commercial banks in China have not yet completely implement Basel II, the requirement of minimum 8% of CAR and the requirement of minimum 4% of Tier 1 ratio set up in the Basel I are already applicable to all banks in China for many years.
CAR measures Tier 1 capital plus Tier 2 capital as a percentage of risk weighted assets and off balance sheet risk, under the Basel rules this ratio should in no event lower than 8%. Similarly, Tier 1 Ratio measures Tier 1 capital as a percentage of risk weighted assets and off balance sheet risk, under the Basel rules this ratio should be at least 4%.23
23 Tier 1 capital includes shareholder funds, perpetual non cumulative preference shares; Tier 2 capital includes subordinated debt, hybrid capital, loan loss reserves and the valuation reserves.
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Table 2-18: Timetable of Basel II Implementation for Banking Industry in China
Stage Year Policy
I 2008
By the end of 2008 CBRC successively issued supervisory rules regarding the Basel II implementation and made amendments to the existing capital regulation requirements by taking public opinions into account.
II 2009
During 2009 CBRC conducted Quantitative Impact Study to evaluate the impact of the Basel II implementation on the capital adequacy of banks.
III
2010
From the beginning of 2010 CBRC starts to accept applications of the bank which plans to adopt the Basel II, and the official applications should be made at least six months prior to the adoption.
From the end of 2010 Basel II banks should start the implementation. If by then banks fail to meet the minimum requirements set by the CBRC, with the CBRC’s approval they may postpone implementation but should not later than 2013.
From the end of 2010 other commercial banks (including foreign bank subsidiaries) should be subject to the revised capital regulation requirements. Besides, if the Basel II banks have, by then, not started the Basel II implementation, they will also be subject to the revised capital regulation requirements
2011
After 2011 other commercial banks may propose an application for the Basel II implementation voluntarily by going through the same procedures as the Basel II banks do.
2013 By the end of 2013 is deadline of implementation for Basel II banks.
Source: China Banking Regulatory Commission, http://www.cbrc.gov.cn/english/home/jsp/docView.jsp?docID
=200703190C3356986BEDAB3AFF45DA32BF983500.
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Table 2-19 shows that in 2003 there were only 8 commercial banks in China met the requirement of 8% CAR, but the number has increased rapidly year on year, in 2009 almost every commercial banks in China met the requirement, and according to the year 2009 annual report of CBRC the average CAR of commercial banks has reached 11.4%.
Table 2-19: Number of Commercial Banks Meet CAR Requirements in China—
2003~2009
Year
Item 2003 2004 2005 2006 2007 2008 2009
Banks
(Number) 8 30 53 100 161 204 239
Share in total banking assets
(%)
0.6 47.5 75.1 77.4 79 99.9 100
Source: China Banking Regulatory Commission, Annual Report, 2009.
Table 2-20 summarizes CAR of SOCBs from 2007 to 2009, except the data of ABC in 2007 was not available, since 2007 every SOCB has met the minimum requirement of 8% CAR, but under the consideration of macroeconomic conditions, rapid growth of credit supply and associated risk, in 2009 CBRC has required banks in China to raise their CAR over the standard of 8%. Accordingly, the CAR of small-and-medium-sized banks as a whole was required to reach 10%; meanwhile, the overall CAR of systematically important large banks was required to reach 11%.
In 2009 except the CAR of ABC was only 10.07% which failed the CBRC’s requirement, CAR of other SOCBs are all beyond 11% and all of them have met the new prudential supervisory requirement.
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Table 2-20: Capital Adequacy Ratio of SOCBs in China—2007~2009
Unit: %
Bank
Year
ICBC CCB ABC BOC BOCOM2007
13.00 12.60 NA 13.00 14.402008
13.00 12.20 9.40 13.00 13.502009
12.00 11.70 10.07 11.00 12.00Note: NA indicates no data available.
Source: Bankscope, http://bankscope.bvdep.com/ip; ABC, Annual Report, 2009.
Table 2-21 shows Tier 1 ratio of SOCBs from 2007 to 2009, since 2007 every SOCB has met the minimum requirement of 4% Tier 1 ratio, except the data of ABC in 2007 was not available, moreover, among SOCBs the figure of Tier 1 ratio of ABC was the lowest during this period.
China government has made a lot of efforts to force banking industry be in line with international norm, and both CAR and Tier 1 ratio of SOCBs for last three years showed that the achievement is satisfactory and successful.
Table 2-21: Tier 1 Ratio of SOCBs in China—2007~2009
Unit: %
Bank
Year
ICBC CCB ABC BOC BOCOM2007
11.00 10.40 NA 11.00 10.302008
11.00 10.20 8.00 11.00 9.502009
10.00 9.30 7.74 9.00 8.20Note: NA indicates no data available.
Source: Bankscope, http://bankscope.bvdep.com/ip; ABC, Annual Report, 2009.