Revised capital rules a positive for Chinese banks’ operating environment

It is expected to have minimal impact on local banks’ capital position.

China’s revised capital rules for commercial banks will have minimal impact on local banks’ capital positions, reports Fitch Ratings.

Successful implementation could be a positive for the sector’s operating environment in the future, the ratings agency said in a commentary.

On 18 February, the local banking regulator launched a draft consultation on new capital rules implementing the final Basel III standard for large- and medium-sized commercial banks. Targeted to take effect on 1 January 2024, the new measures classifies banks into three buckets based on their balance sheets and international exposures.

The rules for the largest banks that fall into the first bucket  are closely aligned with the final Basel III framework, except for more conservative risk weights for certain assets, Fitch noted.

“This will enhance the risk sensitivity of their capital management and improve the comparability of their capital ratios and public disclosures in a global context,” the ratings agency said.

Capital rules for the second-bucket banks are reportedly more simplified and largely unchanged from current requirements.

The smallest banks, or those belonging in the third bucket, will be subject to the most simplified capital and disclosure standards. The new rules do not lower their current capital requirement.

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Fitch believes that the tiered supervision shows China’s efforts to “strike a balance between improving the resiliency of the banking sector and limiting the cost of regulatory compliance on smaller banks.”

“We consider the change in the calculation method for credit risk as most significant because credit risk accounts for most of Chinese banks’ risk-taking activity, although this will have limited impact on ratings,” Fitch said.

It added that those using the revised standard will enjoy a modest capital uplift and lowered risks from specific credit exposures to economy-supporting sectors.

“Still, the potential capital uplift from more favourable treatment for the risk exposure will be partly offset by the higher risk weights for several other exposure types that may be more interconnected with the financial system,” Fitch said.