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Make a point! Changes in the reporting requirements and content of the Capital Measures

2024-01-02

On November 1, 2023, the State Administration of Financial Supervision and Administration issued the Measures for the Capital Management of Commercial Banks (hereinafter referred to as the "Capital Measures"), focusing on the principle of "risk-based", comprehensively improving the capital supervision system, establishing a differentiated capital supervision system, further promoting the upgrading of banks' risk management capabilities, and improving the level of refined risk management of banks.

The overall system of the Capital Measures consists of the main body of the Measures and 25 annexes, and the revisions mainly focus on the construction of a differentiated capital supervision system, the reconstruction of the risk-weighted asset measurement rules under Pillar 1, the improvement and adjustment of the supervision and inspection regulations of Pillar 2, and the comprehensive improvement of the information disclosure standards and content of Pillar 3. Along with the Capital Measures, a notice on matters related to the implementation of the Measures for the Capital Management of Commercial Banks was also promulgated, clarifying the specific arrangements for the transition period and the submission of regulatory statements during the implementation of the new capital measures.

Regulatory reporting requirements for commercial banks

The State Administration of Financial Supervision and Administration has formulated transitional arrangement requirements in terms of measurement methods, information disclosure, regulatory reporting, and loss provision under the weight method, and set different requirements for the transition period, transition period, and after the transition period, and banks need to make synchronous long-term planning and construction plans.

The key points of the transition period are summarised below:

一. 1 year parallel submission period

From the date of implementation of the Capital Measures to the end of 2024, commercial banks shall separately calculate and submit off-site capital supervision statements in accordance with the relevant requirements of the old and new Capital Measures. Among them, the first submission of market risk-related reports will start from the end of the first quarter of 2024.

二. 3-year parallel period: the internal loss multiplier of operational risk

For banks that apply for self-calculation of the internal loss multiplier of operational risk and pass the regulatory acceptance, a three-year parallel period will be set, and the internal loss multiplier for the first, second and third years shall not be less than 90%, 80% and 72.5% respectively.

三. 2-year transition period: provision for loss by weighted method

A two-year transition period has been set for loss provisions included in net capital: During the transition period, commercial banks should calculate loan loss provisions and non-credit asset loss provisions separately, and set a conversion factor when calculating the minimum requirements for non-credit asset loss provisions, so as to increase the minimum requirements for non-credit asset loss provisions year by year. The transition period gives banks with large non-credit NPL balances a two-year buffer period to adjust and reduce their adverse impact on capital adequacy ratios.

四. 5-year transition period: information disclosure

Compared with the Consultation Paper, the requirements for information disclosure in the official draft are not only divided according to grades, but also add consideration to the importance of the domestic system and the listing situation. At the same time, an appropriate transition period has been introduced, which can be buffered more in line with the business scale of banks of various grades, so that they can enter the formal submission more smoothly and smoothly. The specific transition period and submission content are as follows:

When a commercial bank makes information disclosure for the first time, it corresponds to the following four forms: the key prudential supervision indicators (KMI) of regulatory consolidation, the regulatory requirements for the total loss-absorbing capacity of the disposal group (KM2), the risk-weighted asset profile (OV1), and the leverage ratio (LR2). In addition to the above-mentioned forms, commercial banks shall disclose the remaining forms in full and at the prescribed frequency from the first disclosure.

The main changes in the main text of the Capital Measures

一、Increase the statistical indicators of leverage ratio

The leverage ratio refers to the ratio between the net Tier 1 capital held by a commercial bank and in accordance with the provisions of these Measures and the adjusted balance of assets on and off the balance sheet. The new statistical requirement of a leverage ratio of not less than 4% in the capital regulatory index mainly considers the leverage ratio as a risk-neutral indicator, which effectively complements the risk-based capital adequacy ratio indicator.

二、Construct a differentiated capital supervision system - classification of commercial banks

According to the scale and complexity of the business, the Capital Measures divide commercial banks into three grades, matching different capital supervision schemes.
（一）Among them, banks with larger scale or more cross-border business are classified as the first tier, which is in line with the international rules for capital supervision;
（二）Banks with smaller scale and less cross-border business will be included in the second tranche and relatively simplified regulatory rules will be implemented;

（三）The third tranche is mainly for banks with smaller scale and no cross-border business, which further simplifies the capital measurement requirements and guides them to focus on county-level and small and micro financial services. The specific classification conditions are as follows:

三、Reconstruct the measurement rules for risk-weighted assets under Pillar 1

In general, the Capital Measures aim to enhance the logical consistency between the standard method and the advanced method and improve the sensitivity of the measurement of risk-weighted assets. At the same time, it also restricts the use of internal models and reduces the arbitrage space of internal models.

（一）Credit Risk

In terms of credit risk, the new weighting method focuses on optimizing the risk exposure classification criteria, adding risk drivers, and refining risk weights.

The main changes in credit risk exposure in the balance sheet

1.Exposure to sovereign risk
Added to the scope of sovereignty the risk exposure statistics of specific international financial organizations (with a weight of 0%): the Bank for International Settlements, the International Monetary Fund, the European Central Bank, the European Union, the European Stability Mechanism and the European Financial Stability Mechanism.

2.Risk exposure of public sector entities in our country
The weight of risk exposure is refined according to different bond issuers and bond types, and the weight of "risk exposure to China's general public sector entities identified by the China Banking and Insurance Regulatory Commission" is increased to 50%.

3.Exposure to multilateral development banks
The risk exposure to multilateral development banks is separately listed, and the credit rating of multilateral development banks has been increased from the original 0% weight to 20%-150%.

4.Risk exposure of financial institutions
(1)The risk exposure of financial institutions is no longer counted on the basis of domestic and overseas financial institutions, but only the risk exposure of commercial banks and other financial institutions is distinguished.
(2)Commercial banks are divided into four levels according to the standard credit rating: A+, A, B, and C, and the measurement factor of cross-border trade in goods is added, and the corresponding weight ratio is set in combination with the original term of the business transaction.
(3)Under other financial institutions, the concept of investment-grade financial institutions is introduced for the first time, which is different from the 100% risk weight of other financial institutions, and the determination of investment grade lowers the weight to 75%.

These changes have undoubtedly put forward higher requirements for banks to collect customer information and conduct credit risk assessment for interbank counterparties.

5.Company Risk Exposure
(1)Reclassified into "risk exposure to general companies" and "risk exposure to professional loans".
(2)The addition of the designation of investment-grade companies under the risk exposure of general companies (weight: 75%), plus the risk exposure of small and medium-sized enterprises (weight: 85%), are all lower than the 100% weighting ratio of the current measures, reflecting the differentiation of supervision.
(3)The risk exposure to professional loans includes project financing, commodity financing and commodity financing, of which the weight ratio of the pre-operation stage of project financing remains unchanged at 100%, except for 130%.

6.Personal risk exposure
First, each risk exposure is first divided into whether there is a currency mismatch:
(1) If there is no currency mismatch, it is divided into supervised retail individual risk exposure (the bank needs to make a determination of the supervised retail individual, with a weight of 45%/75% respectively) and other personal risk exposure (the weight is raised to 100%);
(2)For the risk exposure weight of individuals with currency mismatch, the minimum value of the risk weight is 1.5 times and 150% of the weight in the absence of currency mismatch (this part is fixed at 150% in the Consultation Paper).

7.Real estate loan exposure

(1)The risk exposure of real estate loans is divided into three categories and measured separately: real estate development risk exposure, residential real estate risk exposure, and commercial real estate risk exposure, and different measurement requirements are formulated for each type of risk exposure.
(2)For the risk exposure of residential real estate, multiple risk weights are set according to the source of repayment and the loan-to-value ratio (LTV). For example, compared with the Consultation Paper, the official draft increases the LTV by 10%, further refines the span of residential real estate risk exposure from 50%-100% LTV, and lowers the risk weight ratio ranging from 15% to 30%. This adjustment not only facilitates the development of banking business secured by residential real estate such as corporate and personal housing mortgages, housing mortgage loans, etc., but also puts forward higher management and valuation requirements for banks' collateral management.

Major changes in off-balance sheet credit risk exposure:

In addition to the adjustment of on-balance sheet credit exposures, the Capital Measures also revise the off-balance sheet credit conversion coefficients:

1.Domestic letter of credit business

Compared with the Consultation Paper, which does not distinguish between types and will be treated uniformly according to the weight of 100%, the official draft distinguishes according to the classification of trade in goods and services and different tenors, and the weight of domestic letters of credit based on trade in services is reduced to 50%, while the weight of short-term contingent items directly related to trade is directly reduced to 20%, which is more conducive to the development of domestic L/C business, especially short-term L/C directly related to trade.

2.Commitment to business

Removed the phrase "unused personal revolving loan facility", meaning that a minimum credit conversion factor of 10% can be applied to this component.

Clarify the measurement of asset management products

It further clarifies the measurement of capital for investment in asset management products, compared with the simple description of the original Capital Measures, which can be worn and worn, otherwise it will be calculated according to the highest weight, the new Capital Measures refer to international standards, and put forward three measurement methods: the penetration method, the authorization basis method and the 1250% weight, and specify in detail the conditions that should be met by each method.

（二）Market Risk

Market risk refers to the risk of losses in the on-balance sheet and off-balance sheet business of a commercial bank due to adverse changes in market prices (interest rates, exchange rates, stock prices and commodity prices). In terms of the measurement of market risk, the original standard method, the internal model method and the simplified standard method are retained, but they are all optimized and upgraded. (The changes are shown below)

（三）Operational risk

Operational risk refers to the risk of loss due to problems with internal procedures, employees, IT systems, and external events, including legal risks, but excluding strategic risks and reputational risks. In terms of measurement in the direction of operation, the "Capital Measures" abolished the advanced measurement method (i.e., the internal model method), retained the basic index method, and introduced the most adjustment factor of the internal loss multiplier, and improved the standard method. (The changes are shown below)

四、Fourth, improve and adjust the provisions on the supervision and inspection of the second pillar

The "Capital Measures" also improve the supervision and inspection provisions from the following aspects:
1. Raise the assessment standards for risks such as interest rates, liquidity, and reputation of bank books;
2. Emphasize comprehensive risk management and include large risk exposures in the scope of concentration risk assessment.
3. Require the use of stress testing tools, risk management and provision for additional capital.

五、Comprehensively improve the standards and content of the third pillar of information disclosure

While the Capital Measures put forward higher requirements for information disclosure, it also sets up a five-year parallel period to give commercial banks a greater buffer to cope with regulatory reporting requirements. Banks have formulated differentiated information disclosure requirements for different levels of information, and the frequency of disclosure includes temporary, quarterly, semi-annual and annual, which means that banks have the awareness and ability to actively disclose and transparency, and provide the regulator and the public with true, accurate and complete capital supervision index data of banks.

The implementation of the Capital Measures is a systematic project for banks, and while comprehensively carrying out refined risk management, the Measures play the role of a baton to guide banks to do a good job in capital utilization, optimize asset structure, and better serve the real economy. The global financial environment has shown a more severe situation, the global banking industry is facing risk transmission and contagion, which has brought significant systemic risk pressure to banks, and the banking industry should fully do a good job in comprehensive risk management, on the basis of traditional risk measurement, monitoring, risk reporting and other risk management, use financial technology innovation, and better play the role of capital and risk management in the process of business planning and operation.

*Some of the contents are quoted from: Measures for the Administration of Capital of Commercial Banks and related annexes, and the Notice of the State Administration of Financial Supervision on Matters Concerning the Implementation of the Measures for the Management of Capital of Commercial Banks.

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