Tougher banking rules boost banking safety in China

Rating agency Standard & Poor’s applauds China’s amended reserve regulations.

It said the tougher rules imposed by the Ministry of Finance will boost banking safety over the long-term as banks set aside more money to further buffer credit reserves.

"The MOF rule could also largely offset possible negative effects from the sector's transition into BASEL II on credit risk buffers," it said.

The MOF last week asked financial firms to have a loan loss provision of no less than 1.5% of their gross loans. The requirement is up from the existing 1% provision and will come into force on July 1.

Under the new rules, financial institutions will now distribute more profits into the general banking risk reserve under shareholder’s equity. The revised regulation reflects fears about the possible deterioration in the asset quality Chinese banks amidst faltering economic growth.

Because of the good profitability and cautious dividend policy of Chinese banks, however, S&P believes the adjustment will simply alter the mix of profit distribution between retained profits and general banking risks reserves and won’t lead to significant challenges for most major Chinese banks.