China’s top banking regulator has warned banks to make sure they comply with capital adequacy ratio (CAR) requirements, or else face strict sanctions.
The regulator is worried that bad loans due to rampant lending may end up being far worse than expected, eroding bank’s capital bases and creating a Chinese financial crisis in the future.
Some suspect that the regulator is even preparing to increase Chinese capital requirements even further, despite having already increased bank’s required CAR to 10% from 8% at the end of 2008.
WSJ: A spokesman for China Construction Bank Corp, one of the Big Four state lenders, said the banking regulator “is considering imposing stricter capital requirements for lenders” next year, and the bank is closely monitoring the situation. Hu Changmiao said his bank “isn’t yet sure” whether the CBRC will decide to raise its capital requirement and if so, by how much, because the regulator “hasn’t issued any written notices.”
A CBRC spokesman said there “won’t be any sudden changes” in banks’ capital requirements. He denied a media report saying the regulator will require major state-owned banks to have a capital adequacy ratio of 13% from next year.
A 13% CAR would be an extremely restrictive measure for Chinese banks, compared to just 8% not too long ago. While such an action would increase the buffer banks have against potential loan losses, it would at the same time likely require Chinese banks to cut back lending growth substantially and raise new capital. (as was th fear today in Asian markets)
Less liquidity is clearly bad news for Chinese asset markets which have been driven by liquidity and where investors use future liquidity (capital flows) as their reason for buying. It would also put the brakes on China’s economic rebound, which right now the entire world depends on.
Chart via the WSJ.