China's banks are the best in world, says the Bank for International Settlements. In at least some respects. This is one of the finding of the Bank for International Settlements, published today in a series of reports on the liquidity coverage ratio of banks globally.
The Basel Committee on Banking Supervision published reports assessing the implementation of the liquidity coverage ratio (LCR) in China, the European Union and the United States.
Overall, the LCR regulations in China and the United States are assessed as “compliant” with the Basel framework. This is the highest of the four grades. The EU LCR regulations are found to be “largely compliant”, one notch below.
Photo courtesy of BIS
Strong China commitment
As one of the largest emerging economies, China has strong commitment to global regulatory standards for the purpose of building a sound and resilient financial system, says the response from the Chinese authorities to the BIS.
In China, the LCR applies to all commercial banks with total assets of at least 200 billion Chinese renminbi (CNY). It was implemented via three regulations on reporting, minimum LCR requirements and disclosure.
These were issued respectively in
- December 2013
- February 2014
- December 2015
They came into effect respectively in
- January 2014
- March 2014
- December 2015
Overall, as of 31 March 2017, the LCR regulations in China are assessed as compliant with Basel LCR standards. All four components are also assessed as compliant, with no gaps identified between the Basel LCR standards and the Chinese regulations.
The assessment team goes so far as to compliment the China Banking Regulatory Commission (CBRC). In some respects, the Chinese LCR is stricter than Basel standards, says the BIS, particularly with respect to the definition of high-quality liquid assets (HQLA).
The assessment includes all internationally active banks based in China and accounts for around 90% of Chinese banking system assets. As of end-2016, 70 banks exceeded the threshold and must comply with LCR rules; this figure has risen gradually in recent years.
Alternative liquidity approaches
The Basel standard allows jurisdictions that have a structural shortfall in HQLA to implement alternative liquidity approaches (ALA). At the time of the assessment, the Chinese authorities have not to date implemented ALA.
The core business of the Chinese banking system remains relatively traditional, concentrated in domestic lending and services. As of end-2016, there were 1,373 banks operating in China. Over 1,000 of these banks are small independent rural banks.
These mainly serve farmers in their local communities. However, the system has grown rapidly in recent years and the depth of many financial markets has increased, along with the size and diversity of institutional investors.
International activity low
Six Chinese banks are internationally active, including the four Chinese banks designated as global systemically important banks (G-SIBs). However, the Chinese banking system’s overseas exposures comprise only around 4% of the banks’ total assets.
USA matches China in achieving highest grade
Switching attention to the USA, as of 31 December 2016 (the cut-off date for the RCAP assessment), the LCR regulations there are assessed as compliant with the Basel LCR standards.
As already noted above, this is the highest grade. All four components, the definition of high-quality liquid assets (HQLA), liquidity outflows, liquidity inflows and disclosure requirements, are also assessed as compliant.
The assessment team identified two issues where further guidance from the Basel Committee is sought. First, the Basel LCR standard provisionally permits the inclusion of marketable securities issued or guaranteed by public sector entities in Level 2A HQLA.
Certain conditions must be met
These securities must meet certain conditions. The assessment team considers that the Committee should clarify the definition of PSEs in the Basel framework. Second, the Basel LCR standard permits jurisdictions to apply a 3% run-off rate to stable deposits.
This is subject to certain criteria on deposit insurance schemes and the jurisdiction being able to provide evidence of run-off rates for such deposits at times of stress.
The assessment team believes the Committee should clarify the evidence required for jurisdictions to be able to apply a 3% run-off rate.
GSEs should be reviewed
The Committee also recommends that the treatment of securities issued by two government-sponsored entities (GSEs) – the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation – be reviewed.
Securities issued or guaranteed by those two GSEs form a large part of Level 2A HQLA for the US banks included in the RCAP sample. Currently, these GSEs are under the conservatorship of the US government.
Conservatorship is a temporary situation. After review and discussion of findings, the Basel Committee concluded that the current treatment of securities issued by Fannie Mae and Freddie Mac is appropriate and consistent with the Basel standard.
The Committee recommends
So long as these entities are under conservatorship. The Committee recommends that the treatment of securities issued by Fannie Mae and Freddie Mac as Level 2A HQLA be reviewed should the conservatorship end or their legal status otherwise materially change.
EU scores second grade
The assessment team finds the EU’s LCR framework to be overall largely compliant with the Basel LCR standard, reflecting the fact that most but not all provisions of the Basel standard were incorporated in the EU LCR framework.
The EU framework components for high-quality liquid assets (HQLA), inflows and disclosure requirements are assessed as largely compliant while the other LCR component, outflows, is assessed as compliant.
As at 31 March 2017 (cut-off date), the assessment team reported 20 remaining deviations from the Basel LCR standards. The majority of these deviations are not assessed as having a quantitatively or qualitatively material impact at the time of the RCAP review.
Nevertheless, the assessment etam identified one material deviation and four potentially material deviations that significantly overstate or may overstate the LCR for some banks in the EU.
This, in turn, could affect fairness and comparability both between EU banks and vis-à-vis other banks in jurisdictions that subscribe to the Basel framework, says the BIS.
Reports in context
These reports form part of a series of publications on the implementation of Basel standards in member jurisdictions. The Regulatory Consistency Assessment Programme (RCAP) is a central element of efforts to promote timely adoption of its standards.
The RCAP helps member jurisdictions identify deviations from the Basel framework, weigh the materiality of any deviations and undertake necessary reforms. Many jurisdictions have already amended their regulations to align them more closely with the Basel framework.