China Hesitates Over Basel II
China Banking Regulatory Commission chairman Liu Mingkang
has signaled that China will continue to abide by Basel
I standards for capitalization requirements. Under Basel
I, banks are required to have a minimum capital ratio
of 8 percent to cover potential losses from bad loans.
Liu's message signals that China's banks are not yet
able and ready to meet the more stringent capitalization
requirements of Basel II, which is scheduled to take effect
in 2006.
China's banking sector is currently severely under-capitalized
by non-performing loans from state-owned enterprises (SOEs).
Virtually all of the SOEs are operating at a loss, and
have almost no chance of being able to repay their loans.
Previously, China's state-owned banking sector loans were
forced to make the loans as public policy. Frequently,
these loans were referred to as "policy loans".
Experts estimate that China needs up to 3.9 trillion
yuan to recapitalize under the terms of Basel I.
Basel II asks banks to assess their credit and operational
risks, and give them the option of using internal risk-rating
systems for risk assessment. Lending to SOEs carries a
100 percent risk; currently Chinese banks give them a
20-70 percent risk.
Basel II also would lower the risk rating for retail
loans such as residential mortgages and corporate loans
which had acquired certain credit ratings.
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