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New capital rules aim to spur lending

By Qiu Chen  (Global Times)

08:19, June 08, 2012

Newly revised capital rules for China's banks may help the nation avoid a credit squeeze as financial regulators move to combat the country's slowing economy, experts told the Global Times Thursday.

While many economists and experts had been expecting regulators to increase capital adequacy ratios (CAR) at the nation's lenders, according to an announcement from the State Council on Wednesday, the rates will remain nominally unchanged under the new guidelines - that is, 11.5 percent for large State-owned banks and 10.5 percent for all other banks - which will go into effect at the beginning of next year.

Yet, the new regulations are still intended to loosen the reins on bank credit, as they will introduce a more relaxed formula to compute banks' CAR, Yu Fenghui, a senior official from Agricultural Bank of China, told the Global Times.

Under the new regulations, commercial banks will be allowed to include their loan loss reserves as part of their capital, which will allow lenders to issue more in financing under the same CAR requirements, according to Yu. "Banks will be given a new source that can be counted as capital, which will help them increase their credit quotas compared to the current rules," Yu explained.

Also, lending to individuals and small and medium-sized enterprises (SMEs) will be encouraged along with the new rules, as banks will also be required to lower their risk tolerance for these borrowers.

The new measures, combined with a delay in implementation, indicate that the government aims to ensure lending growth will continue at an appropriate pace to stimulate the country's economy, according to Yu.

Prior to the release of the new regulations, the government had initially planned to introduce new bank management standards established under the global Basel III regime, but postponed their adoption on concerns that they would put pressure on SMEs.

However, Zhao Xijun, deputy director of the School of Finance at Renmin University of China, said it is unfair for the government to force banks to ease their risk controls by asking them to adopt new risk management tools, such as credit value adjustment (CVA), which is used to estimate the market value of a counterparty's credit risk, to comply with the upcoming rules.

The government should also not use the banks' new capital rules, which will be carried out for several years, to cope with the short-term economic slowdown, said Zhao. "It will cause confusion to explain the country's long-term policy from the perspective of its recent economic target," Zhao noted.

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