Six of China’s largest banks are being given a freer hand to determine the formulas for their capital-adequacy ratios, a move that may not necessarily result in a better financial picture, the Wall Street Journal reported.
The China Banking Regulatory Commission has said the new rule brings the banks closer to the way Western banks apply risk weights to assets under the Basel III international banking standards.
The logic behind letting big banks participate more in calculating their regulatory capital is that the banks themselves know better than the regulator the relative risks of what they hold on their balance sheets.
While regulators are still heavily involved in approving the “advanced” risk-weight formulas that the banks will use, standard risk weightings under the legacy system could allow banks to mask the true risks they are taking on, the report said.
It is widely assumed by investors that Chinese banks are already understating the risk of their assets. The new freedom in internal models for risk weighting may only make a potentially bad situation worse, it said.
As of now, China’s banks appear to have plenty of capital, with top banks boasting a common Tier 1 ratio of 10 percent on average. Investors, however, would be well advised to remain skeptical and not assume that the new capital formulas are a great leap forward, the Journal said.
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