Measures For Capital Adequacy Ratio Of Commercial Banks And The Safe And Sound Operation Of Commercial Banks

The issuance of the Measures for Capital Adequacy Ratio of Commercial Bank (the"Measures") in 2004 brought great revolution to China bank industry. The commercial banks try their best to raise their capital adequacy ratio to meet the target ratio set up by the supervisor during the past few years. Data shows that the capital adequacy ratios rose significantly after the issuance of the Measures and relevant laws and regulations. While when examining the methods and process adopted by the commercial banks for raising capital requirements, we find that the commercial banks raised the capital adequacy ratio only for the purpose of raising such ratio, no attention was paid to risk management.Capital adequacy requirements regulation has been criticized for a long time and from many aspects. The most famous international capital adequacy framework, the 1988 Basel Capital Accord (Basel I), which the Measures based on is also criticized. Basel I has some inherent defects, such as unreasonable risk allocation, dividing the capital into different categories improperly, only focusing on credit risk, offering no reasons for the 8% ratio and disregarding the risk dispersing effect of investment portfolios etc. These defects have induced the regulatory capital arbitration in certain extent, which renders the capital adequacy ratio less and less meaningful and comparative. These defects may also have induced the banks to chase risk, also have the defects induced credit crunch which may do great harm to microeconomic. These defects and the bad influences make Basel I failed to ensure the safety and soundness of the bank system or to create an even playing field to the banks.Facing the criticisms to the 1988 Basel Capital Accord, Basel Committee proposed a new framework in 1999 which was issued in 2004 after several revisions. The New Basel Capital Accord (Basel II) established a three-pillar structure– capital adequacy ratio, supervisor and market discipline, with the purpose to reflect the risks completely and accurately. While there are also defects in the New Basel Capital Accord and is criticized as a"superficial contrition"to Basel I. The complicated internal-rating-based approach makes the transparency lower and thus renders the supervision difficult and ineffective; besides, there is no provision about the at-risk investors in Basel II and thus makes the market discipline a fiction.The legislators should have a full understanding of insufficiency of Basel Accords (both Basel I and Basel II) and capital adequacy requirements to avoid the questions during the legislative process so that to ensure the safety and soundness of banking system. Meanwhile, we should pay attention to the differences between the commercial banks in China and the foreign commercial banks. Many Chinese commercial banks are stated-control company, the Country is a shareholder who can not enjoy the privilege of limited liability, and the commercial banks were casher for the Country for a long time historically, and the"monster"image of the bank because of the general office– branch office– sub-branch office structure, all the above differences will affect the necessity and validity of capital adequacy requirement, also will need different provisions in the rules. The banks should not treat the measure as purpose, to ensure the safety and soundness, more effective capital requirements rules are needed and the most important thing is to incent the banks to improve the capability and motivation of risk management.