China Macro Flash:Capital Requirement May Tighten To Further

[Skip to the end]

Looks like the push to restrict lending is continuing.

The new capital will ‘automatically’ be available for profitable loans, but it will take some time and some repricing of risk.

>   (email exchange)
>   On Fri, Aug 21, 2009 at 5:53 AM, Dave wrote:
>   Good summary of rumored changes in China’s banking system

China Macro Flash: Capital Requirement May Tighten To Further Curb Lending

The reported tightening of bank capital requirement is in a draft of
regulatory changes that are being circulated among banks for feedback.
It is likely a measure prepared by the government to curb loan growth
and asset price bubbles. If bank loans and asset prices continue to
rise, new rules could be enforced quickly, but if both stabilize or
undergo healthy adjustments or corrections, it is not clear how soon the
changes will be adopted.

The core of changes suggested in the draft is to end the connection
among banks through mutual holding of subordinated and hybrid debts.
These debts are issued by one bank and held by other lenders. Those
debts that relate one bank to another may increase systematic risk of
the banking sector.

The new rule proposes that:1) The holding of subordinated and hybrid
debts issued by other lenders should be capped. This will make new
issuance of such debts more difficult. 2) Subordinated and hybrid debts
can no longer be counted as supplementary capital. 3) Banks that fall
below the capital adequacy requirement will have to either shrink
balance sheets or issue more shares to lift capital adequacy ratios.

The proposed changes, if implemented, will likely curb loan
growth as some banks will have to cut new loans to fulfill the
requirement. Also, the changes will likely affect smaller banks more
than large state-owned banks. Almost all key state-owned banks (except
the Agricultural Bank of China) were listed in recent years, and their
capital adequacy ratios should be high enough to cope with the change.
Smaller banks facing limited channels of fund raising could suffer the
most. Current excess liquidity should help lower the cost of capital. If
banks need to fulfill the required adjustment in a short period of time,
this could tighten the liquidity condition in the market sizably,
putting downward pressure on asset prices.


One reply on “China Macro Flash:Capital Requirement May Tighten To Further”