Chinese banks brace for effects of Basel III rules

(China Daily) Updated: 2013-01-09 13:44

The consequence is obviously the sharp contrast between the abundance of liquidity in the financial system and the shortage of liquidity in the real economy. It would come as no surprise if this is followed by a hollowing-out effect in the real economy, especially in industrial sectors.

The way Basel III makes rules has the tendency to favor developed economies. It will lead to the buildup of liquidity in the financial system, which will then breed bubbles.

In contrast, the real economy will be squeezed of liquidity, due to its spiral exits from manufacturing industries, etc. Therefore, the implementation of the new rules should be done with prudence. Otherwise, they will be counterproductive.

Furthermore, if China's monetary policy is based on Basel III's liquidity assumptions regardless of the Chinese situation, the economy will end up with excess money in the banking system, whereas the real sector will suffer serious liquidity deprivation.

The conclusion is self-explanatory.

First, the economy's level of leverage, measured by total financial assets compared with GDP, varies from country to country. Thus the liquidity regulation should differentiate toward different settings.

China's economy is relatively low in leverage in regards to both the banking system and the real economy. It goes without saying that the Chinese authority is fully committed to implementing Basel III, but an approach to applying overly stringent capital and liquidity standards obviously do not fit in the macro financial structure characterized by indirect financing. At this stage, it is not advisable to attach so much significance to the two "balloons".

Second, we should implement Basel III step by step and according to our capability, instead of joining a race against time.

The implementation timetable should be tailored to the market infrastructure, the available resources and the special system. China is still making reforms, and the banking sector is playing a dominant role in funding economic development.

Our commitment to Basel III notwithstanding, we have to make sure that the strength of the financial system and the momentum of the GDP growth will not be compromised.

Third, more China factors are needed to be customized in Basel III implementation in order to avoid the problem caused by the mismatch between strict standards and restricted resources. This includes, but is not limited to, a moderate level of capital adequacy ratio, a comprehensive inclusiveness of the marketable assets, and a reasonable definition of the LCR and the NSFR.

China should participate in and be prepared to play a leading role in formulating international standards, including those in the financial sector. Let's begin with Basel III implementation.

The author is executive vice-president of China Everbright Bank.