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News Analysis: China's banks face challenge after rate cut (2)

(Xinhua)

15:08, June 09, 2012

The government has promised to allow market mechanics to play a bigger role in determining interest rates. Thursday's move to adjust the upper limit of the floating band for deposit rates and allow banks to offer a 20 percent discount to borrowers are two of the reforms being made in this area.

Xia Bin, a counselor for the State Council and former member of the monetary policy committee of the PBOC, warned that small banks could suffer losses or even go bankrupt during the process of reform. Although hardships are expected, the road to market-based interest rate reform should be reversed, Xia said.

Since banks are subject to tougher conditions, the government has made greater efforts to enhance risk oversight.

China on Wednesday decided to put its lenders under regulatory supervision within the Basel III framework -- a set of tough capital rules for banks agreed upon by G20 leaders in 2011 -- starting from Jan.1, 2013.

The new regulations allow commercial banks to take in reserves for excess loan losses as capital and define a series of "qualified standards" for capital tools, such as subordinated bonds.

Banks will also be required to expand the scope of their risk supervision framework, adding operational risks into the current framework that highlight credit and market risks, according to the statement.

Systematically important banks will be subject to a capital adequacy ratio (CAR) of 11.5 percent, while other banks will be subject to a CAR of 10.5 percent. Both requirements remain unchanged from the country's existing regulatory rules.

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