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Regulations Governing Capital Adequacy of Commercial Banks (2004)

What determines the capital adequacy for commercial banks in China?
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This document presents a regulation that aims to strengthen the supervision of capital adequacy in commercial banks to help them operate in a safe and sound manner. The document is divided into various chapters. Chapter I contains the general provisions of the law and provides information about:

  • The purpose of the regulation, its application to commercial banks, capital adequacy ratios their calculation and measurement.

Chapter II describes the calculation and measurement of capital adequacy ratios, including:

  • The scope - Financial institutions, investments and banks;
  • The formulae for calculation;
  • Definitions of core capital, total capital and supplementary capital;
  • Deductions related to risk-weighted assets and the risk-weights for different financial institutions;
  • Financial instruments that can serve to mitigate risk.

Chapter III discusses the supervisory review of capital adequacy and intervention, detailing:

  • The responsibility of the senior management in meeting capital adequacy requirements;
  • Reporting to the Central Bank;
  • On-site examination and off-site surveillance;
  • The classification of commercial banks.

Chapter IV discusses disclosure, including items that need to be disclosed and responsibility of disclosure.Chapter V outlines supplementary provisions, emphasizing the freedom that commercial banks have to choose their methods of disclosure and the need for consistency. The document also has a series of annexes that include:

  • Definition of capital;
  • Measurement of interest rate risk and the different kinds of risk;
  • The objectives and strategies of risk management.

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