New financial tools may help banks adapt to tougher rules effective 2013

China's banking regulator on Friday released guidelines to encourage banks to develop new financial instruments to supplement capital levels in preparation for tougher rules effective next year.

Commercial lenders could issue new debt and equity capital instruments when conditions are mature, the China Banking Regulatory Commission said in a statement published on its website.

When the Tier 1 core capital adequacy ratio declines to 5.125 percent or lower, banks could write down principal of the capital instruments, and transform convertible bonds into stocks to get their ratios back to the qualified level, according to the statement.

"The guidelines would improve banks' capability to absorb capital loss on the instruments, and help stabilize the banking system," it said, adding that it is also aiming to encourage banks' innovation in developing capital instruments to help them replenish capital.

It highlighted in the statement that banks should still mainly rely on capital supplement through their own profits, while exploring the new instruments.

In a separate statement, it said that major banks must have a minimum capital adequacy ratio of 9.5 percent by the end of 2013, and 11.5 percent by the end of 2018.

Meanwhile, it said that smaller banks need to have a ratio of 8.5 percent by the end of 2013, and 10.5 percent by the end of 2018.

To ease pressure on lenders that fail to meet the requirements by the end of 2012, the CBRC set different standards for each year between 2013 and 2018, allowing them to gradually catch up with the criteria.

It would also grant certain incentives to banks that meet the new standards before the deadline, said the CBRC.

Wang Zhaoxing, vice-chairman of the commission, said in November that China will not postpone the implementation of tougher capital requirements on banks that are expected to be effective from Jan 1, despite uncertainties over economic recovery and lower profit growth in the industry.

Banks would actively tap those capital instruments next year, particularly hybrid securities, after the regulators announced the new guidelines, said Hu Bin, a vice-president and senior analyst at Moody's Investors Service.

"The gap between Chinese banks and their international counterparts on Tier 1 capital adequacy will be narrowed as a result," he said.

Hybrid securities generally refer to securities combining both debt and equity characteristics, such as convertible bonds.

Hu added that the capital positions of Chinese banks would be sufficient to meet the new requirements, which are in line with the Basel II and Basel III agreements, set by the Basel Committee on Banking Supervision, a global group of central bank governors, on bank capital adequacy and liquidity.

Beijing initially planned to put the new rules into effect at the beginning of 2012.

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