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Tong (Cindy) Li
Adjunct Fellow; Country Manager, Federal Reserve Bank of San Francisco
Asia and Banking and Capital Markets and China and Finance and Global Economy
Dr. Cindy Li is a country manager and analyst in the Country Analysis Unit of the Federal Reserve Bank of San Francisco. In that capacity, she conducts research of Asian financial sectors and produces analyses of Asian foreign banking organizations.
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Basel III in China: Before and after
By: Tong (Cindy) Li
August 23, 2012
   
   
The new global bank regulatory standard, Basel III, is expected to take effect on January 1, 2013. Basel III rules introduce stricter capital requirements for banks. As of this writing, Basel Committee member countries are working on translating the new rules into national laws and regulations. In United States, regulatory agencies will need to resolve important discrepancies and conflicts between Basel III and Dodd-Frank. European regulatorsaEUR"European Banking Authority, European Commission and European CouncilaEUR"have different takes on the EU version of Basel III, which need to be reconciled in future negotiations. Despite the rapidly approaching deadline, we still donaEUR(TM)t know what the final rules will look like across the globe.

As a newcomer to the Basel Committee, China has been eager to make progress. Chinese banks are often criticized for low operational efficiency. There are also reasons to be worried about their earning perspectives based on high reserve requirement ratios (20% for large banks) and the ongoing interest rate liberalization reforms. However, in terms of capital adequacy and quality of capital, Chinese banks are doing well. According to Ba Shusong at Development Research Center of the State Council, most banks have already met the Basel III requirements that are scheduled to phase in by 2019.

Perhaps this is why the China Banking Regulatory Commission felt comfortable developing an ambitious version of Basel III rules last August. Compared with proposals from U.S. and European bank regulators, this preliminary version was significantly more aggressiveaEUR"earlier adoption, higher tier one common equity ratio, and stricter requirements for systemically important institutions. The final rules released in June 2012, however, were milder than the preliminary version (see the table below for a comparison on selected items).

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These changes are motivated by multiple factors. If commercial banks rush to meet the deadlines, bank credit extension will slow down. This will become a strong headwind for the Chinese economy. The last thing Chinese regulators (actually, U.S. and European regulators too) want to see is a hard landing. They have reasons to worry that when too many tightening measures are enacted at the same time, the combined result can turn a soft landing to a hard one.

The milder final rules also reflect voices of the banking industry. After all, why should China put its commercial banks at a competitive disadvantage? Countries tend not to deviate too much from basic guidelines when it comes to coordination of international banking regulations. There is very little reward in over commitment, especially when stricter capital requirements lead to less credit extended to the private sector. China wants to be in line with other countries, but it is in no hurry to outperform.