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China Sets Tough New Rules for Bank Capital

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The China Banking Regulatory Commission (CBRC) has released a draft of some tough new regulations for the nation’s financial institutions. According to a Reuters report, the new rules are aimed at helping to implement Basel III requirements.

The new regulations include a measure that subjects the big banks, also known as systemically important financial institutions (SIFIs), to a minimum capital adequacy ratio (CAR) of 11.5% under "normal conditions." If the CBRC, however, feels that credit growth is too strong, a 14% rate could kick in, along with a countercyclical requirement of up to 2.5%. This goes into effect in early 2012; banks must meet these requirements by 2013.

Non-SIFIs (smaller banks) will be required to carry a CAR of 10.5%, with no countercyclical requirement. The minimum core tier 1 CAR requirement in the new regulations is higher than that set by Basel III, at 5% to Basel’s 4.5%.

Another added regulation is a new leverage ratio of 4% of on- and off-balance-sheet tier 1 capital; this also goes into effect in early 2012, and is higher than the 3% required by Basel III. SIFIs must meet the new requirement by the end of 2013, while non-SIFIs have until the end of 2016 to comply.

Liquidity coverage ratios (LCRs), which are the ratios between high-quality liquid assets and net cash outflows for a 30-day period, will be required for all banks by the end of 2013 to be 100% or more. So will the net funding ratios (NFRs), which are the ratio between usable stable funding sources and needed stable funding sources.