Chinese bank shares have been under substantial pressure over the last week due to concerns that Chinese regulators would impose harsh capital requirements, with some speculating that banks’ capital adequacy ratios (roughly the amount of equity capital they need to hold in relation to their outstanding loans) would be hiked to 15%, which is severe compared to the more lenient 8% level required by latest Basil III regulations out of Europe.
While Chinese regulators have tried to play down these market fears, it appears that stronger capital requirements are indeed in the cards:
“The capital adequacy ratio is expected to be increased by 0.5 per cent to 1 per cent in the next two years,” said a source close to the regulator, adding that a final decision will be made at the end of this year. … “Setting aside a capital conservation buffer for future economic and financial stress is a new trend in the world and also a major target the CBRC is trying to push for,” said the same source at the regulatory body.
A breakdown of the upcoming standards is below. The key take-away is that they’ll be less harsh than many had speculated, but still more strict than Basel III. Chinese banks will also be required to comply with new regulations faster than international banks are being told to comply with Basel III.
The implication of higher capital requirements for Chinese banks is that they will need to both rein-in their loan growth and find fresh sources of equity capital at the same time. This could reduce the availability of credit in the Chinese economy.