Monday, February 8, 2010

China unveils securitization guideline

A guideline aimed at managing securitization risks was published by the China Banking Regulatory Commission (CBRC) Friday on its website. Some analysts believe the guideline will have an influence on the capital adequacy ratio (CAR) of banks planning to implement the New Basel Capital Accord.

The international financial crisis revealed problems existing in supervision policies of capital securitization globally. The guideline was in line with the revised New Basel Capital Accord released in July 2009 that included standards for calculating capital for incremental risk in the trading book, the CBRC said in a statement posted on its website Friday.

Banks' credit has grown rapidly and is reported to have increased by 1.6 trillion yuan ($234.31 billion) in January, prompting the regulatory body to take measures such as establishing a credit quota to control the growth of loans. Banks are likely to transfer credit assets by means of securitization, which might cause risks as a result of creating financial derivative products, said Guo Tianyong, director of the Research Center of China Banking at the Central University of Finance and Economics.

Lawrence G. McDonald, a former Lehman Brothers trading vice president, warned China about moving quickly towards securitization in an interview with the Global Times at the end of last month.

New financial products such as commercial mortgage-backed securities and residential mortgage-backed securities created by securitization adversely impacted the US's economy, McDonald said.

The guideline outlined the computing of regulatory capital demand for securitization risk exposure.

"There is a need for risk-adjusted capital ratios that apply over the course of an economic cycle and are aimed at ensuring conservatism on the part of banks and providing a buffer to cope with shocks," Gerard Lyons, chief economist at Standard Chartered Bank, said in a research note this month.

Banks' CAR will generally drop after implementing the accounting method advocated by the New Basel Capital Accord, as the new accord came up with more strict provisions for assessing the ratio of risky assets, Guo said.

Original posted on Alibaba.com by Li Qiaoyi:

Sun Peng, a banking sector analyst with BOCI, a subsidiary of the Bank of China, echoed Guo's viewpoints, saying that the implementation of the new accord will reduce banks' profit margin on the upswing, while lowering banks' systemic risks on the downswing. Banks will see more stable prospects in the long run, he added.

China Merchants Bank (CMB) will be an exception, with its CAR not affected by the new accord, as CMB mainly focuses on retail services, Sun said.

Lu Zhengwei, a senior analyst at the Industrial Bank, said the guideline won't likely affect banks' CAR for the time being as only a few banks will implement the new accord in the near future, and securitization in China is only at an early stage.

Seven Chinese banks including the Bank of China will run a trial implementation of the accord this year.

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