All Chinese banks are scheduled to implement the new capital accord by the end of 2013. A customer handles business at the Beijing Branch of the Industrial and Commercial Bank of China

"To align China's practice with international standards," said the China Banking Regulatory Commission (CBRC) on its website, "the CBRC Basel II Implementation Group recently revised seven policy documents following the newly released Enhancement to Basel II Framework by the Basel Committee on Banking Supervision."

But that's not all. "Now, the CBRC would like to request public comment on the revised documents listed below. Comments can be submitted to the CBRC International Department," the statement added, noting a closing date of September 15.

The seven supervisory documents are devoted to aspects ranging from the calculation of the capital adequacy ratio to supervisory review for the capital adequacy ratio, the regulatory capital for exposure in asset securitization, as well as management of interest rate risks on banking books and the internal model approach to capital for market risks.

Against a background of Chinese commercial banks that had granted a huge amount of loans in the first half of this year, the CBRC announcement has great significance in preventing risks to the banking sector. Yu Xiaoyi, analyst at Guangfa Securities Co. Ltd., for one, thinks the credit policy is favoring risk control.

According to the CBRC plan on implementing the new capital accord by the end of 2010, large Chinese commercial banks will be the first to implement a new capital accord and—by the end of 2013 at the latest—all Chinese banks will have entered into the agreement.

To guarantee implementation by the end of 2010 as scheduled, the CBRC has solicited opinions for the above seven guidance documents since December 2008 and has modified these documents according to the newly released Enhancement to Basel II Framework by the Basel Committee on Banking Supervision.

The issuers of these documents, this time seeking public input, are hoping to standardize calculation of the capital adequacy ratio, while providing detailed ways with which to handle various types of capital investments. In turn, the goal is to explain all the items to calculate the capital adequacy ratio under the new capital accord.

For the first time, however, the documents require "the balance of capital tools issued by other banks that a commercial bank holds shall not surpass 20 percent of its core capital."

Beginning this year, the CBRC will continuously monitor the banks that implement the new capital accord, assessing the influence of the new agreement toward the capital adequacy ratio. According to the CBRC arrangement, it will finish monitoring and assessment on the banks seeking to implement the new accord by the end of 2010.

Why implement of the accord?

Huang Zhiling, General Manager of the Risk Management Department of China Construction Bank, said that since the Basel Convention was released for implementation in 1988, it has been a hot topic in the financial field. There are both pros and cons to this end. After the new capital accord was released, for instance, queries never stopped.

According to Huang, there have been many such questions within the Chinese banking sector: Is the new capital accord effective? If so, why is it that many leading international financial institutions cannot resist the crisis? Why would it be ineffective? Should the Chinese banking sector implement this new capital accord?

In Huang's opinion, understanding these issues is just as important as understanding whether the Chinese banking industry can learn from past experience and go on to establish itself amid the global economic downturn. In Huang's mind, moreover, the new capital accord is a piece of a bigger puzzle.

On reflection, he notes, the financial crisis is by no means a referendum on the efficiency of the new capital accord. "Seeing from the timeframe, many businesses whose actions led to the financial crisis took place before the new capital accord," Huang said. Moreover, "many crisis-afflicted institutions did not abide by the new capital accord."

Looking back at the financial crisis, he added, China can discern the breakout of the roots of the financial crisis from sub-prime loans and their derivatives. The New Basel Capital Accord was officially released in June 2004, and required implementation as of 2006. Europe, Australia, Hong Kong and Singapore began instilling the new capital accord from 2008. But before the financial crisis, the United States had not carried out its part in the accord.

Meanwhile, the precipitator of the financial crisis—the U.S. economy—has traditionally been passive in implementing the new capital accord.

According to Huang, many banks that have been carrying out the new accord have achieved good performance over time during the crisis. Though not a member of the Basel Committee, Australia in particular has always held a positive attitude toward the agreement. In fact, it started implementing the accord from the outset of 2008. Disclosed information, by now, indicates that the Australian banking industry has been slightly affected by the crisis at this time.

Hence, to guard against risks, China's banking sector should be active in carrying out the new capital accord.

No impetus to lend

In the first half of 2009, Chinese commercial banks granted 7.37 trillion yuan ($1.08 trillion) in loans, hitting a record high, with the amount greatly surpassing the target of 5 trillion yuan ($732.06 billion) for the whole year, announced by the government work report delivered this March.