Commercial banks in China refine their capital and risk management

China’s banking regulator and central bank plan to adopt a differentiated regulatory system for assessing commercial banks’ capital adequacy and risk management, in an effort to prevent financial system risks.

In a joint announcement, the China Banking and Insurance Regulatory Commission and the People’s Bank of China announced amended draft rules aimed at helping banks “continuously improve the precision of risk measurement.”

By dividing lenders into three categories based on business scale and risk level, the draft rules bring the banking sector closer to global standards.

Lenders with a relatively large scale of assets or cross-border business will be subject to stricter capital requirements and will have to disclose more information to regulators.

Furthermore, the rules will include more specific factors to measure banks’ exposure to mortgage lending, such as the type of property, the source of repayments, and the loan-to-value ratio.

Due to fragile demand and mounting debt defaults by developers, China’s property market has slowed sharply over the past year.

Nevertheless, some banks’ capital adequacy ratios will change slightly following implementation of the new rules, according to the two regulators.

Before Jan. 1, 2024, the commission and central bank are seeking public comments.