Date: December 16, 2010 Source: 21st Century Economic Report
“The Chinese banking industry did not get out of their predicament by depending on the Basel Accords, which does not mean that Basel III is a remedy for all.” When accepting the special interview from 21st Century Economic Report, President Li Renjie of the Industrial Bank said that China has to learn from the Basel Accords and establish a Chinese version at the same time. The market gave an over-interpretation and China Banking Regulatory Commission now puts forward the concept of LLR/Loan. The Chinese version of Basel III is taking shape step by step.
With regard to the schedules for Basel III and Chinese Basel III, Li Renjie said it is unnecessary to take a sweeping approach. Big banks, especially those have stepped out of China , medium-sized banks like the Industrial Bank, and small banks with markets in limited areas should have respective schedules, and some even do not need such a schedule in the short term.
Basel III Aims at Big International Banks
21st Century: What influences has the Basel Accord brought to Chinese banking?
Li Renjie: It is reported that our banking regulatory agency is working in this respect, discussing the Chinese Basel III. In fact, Basel II has yet applied to the world's entire banking industry, but we, jump to Basel III. Why? In my opinion, this financial crisis lets us discover a number of regulatory gaps, and now Basel III is aimed at filling these gaps, the world has formed a new consensus.
In my opinion, it doesn't mean that Basel III is a remedy for all ills. Not only Basel III, but the previous Basel II hasn't been applied to all the world's banks.
Objectively speaking, Basel III (even including Basel II), is first aimed at big transnational banks. The essential issue to be addressed is providing a set of regulatory standards and norms recognized in all countries for financial institutions with international operations and complicated business systems, so as to promote the reconstruction of the international financial system. Yet, it does not mean all banks, regardless of their sizes or countries, must act according to that standard.
21st Centaury: To which direction is the Industrial Bank's thinking about Basel III heading?
Li Renjie: Why do we talk about Chinese Basel III now? The premise is that we all recognize that the implementation of Basel Accord in China must be a process of localization, rather than a simple copy. We believe the regulatory department can not take a sweeping approach. For example, as for commercial city banks and rural credit cooperatives operating in mainly relatively small regional markets, do they need to follow the regulatory standard of Basel III? It is obviously unnecessary.
As for medium banks like the IB, do we need to learn or understand the spirits of Basel III? Do we need to act based on its concept, methods and instruments? Yes, we do, because this is indeed a summary of many years' of experiences and lessons from the financial institutions in markets from all countries, especially the developed ones, and there are a lot of rule-based practices. But it is infeasible to apply it mechanically.
Chinese Basel III is the Key
21st Centaury: In your opinion, on which path will Basel III be carried out in Chinese financial institutions?
Li Renjie: Firstly, different agencies have different requirements. For example, those big transnational banks that have gone and carried out acquisitions and conducted operations globally must make a head start, because if they do not follow the standard, people in the other countries will not accept them. However, as for the medium-sized and small-sized banks like the Industrial Bank that mainly operate at home, it is not so urgent for us to do so as early as 2011 or 2012.
Secondly, the implementation requirements for specific indices should be different. For example, the “leverage ratio” index is put forward by Basel III, and why should that index be established? Because the business structure and product mix of a transnational bank are too complicated and difficult to calculate clearly. For the purpose of simplified operation, a simple and practical index is put forward. Is it reasonable? Sure, we agree with it. I see LLR/Loan to be a concept of a dynamic provision that is to reduce other provisions when there are better benefits and profits, so as to prepare for economic retrenchment. Of course, there is no precedent in practice for this approach currently, and its results are subject to the test of being put into practice. However, the concept is right. In terms of a specific requirement, the criteria proposed initially by the China Banking Regulatory Commission is 2.5%, but to a great extent, that is proposed based on the regulatory experiences and subjective judgment on the average risk level of the whole industry. In terms of specific operations, no solution is suitable for all, and different institutions should follow different standards and different timetables to reach such standards gradually.
In this respect, I think the society over-interpreted not long ago. In fact, the impact of the index to banks is not as great as what all of us imagine. Firstly, the index does not require us to meet it at once, but it to be achieved step by step and year by year; and by doing so, these banks at home may have the capacity to digest it without to much trouble. Secondly, in terms of preventing risks, banks can essentially benefit from the index because it plays the role of an “iron” to influence of economic cycle of banking operations. Is there anything wrong with saving more provisions during desirable operating periods?
21st Centaury: the key is how to determine the proportion?
Li Renjie: I see the proportion being a dynamic concept, that is to say, it will be adjusted with the economic cycle and business situations in a dynamic way, instead of changelessness and without flexibility.
21st Centaury: Chinese Basel III is good for banks in the long run.
Li Renjie: In terms of capital market, I think the issue has been over-interpreted and over-reacted by all of us this year. Either in short term or long term, it is beneficial to strengthen regulation. To be specific, in the short run, the statements of each bank is very shinning in this year, and their profits are sure to be good, and asset quality stable. In the long run, the development expectation of the banks is also very promising. In addition, upgrading LLR/Loan in actuality means that the regulatory department, from the banking industry's perspective, provides more support for banks through more communications with finance and taxation departments. This is good, isn't it?