On 1 June, the China Banking Regulatory Commission (CBRC) promulgated the Leverage Ratios in Commercial Banks Administrative Measures which will take effect on 1 January 2012.
Definition and calculation
According to the Measures, leverage ratio means the ratio of the total of adjusted on-balance sheet assets to the adjusted total of off-balance sheet assets of banks with tier 1 capital and of commercial banks in accordance with relevant regulations.
The leverage ratio of the consolidated statements and unconsolidated statements of a commercial bank must not be less than 4%.
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(1) Firstly, tier 1 capital and tier 1 capital deductibles are those tier 1 capital and tier 1 capital deductibles used by commercial banks in calculating their capital adequacy ratios in accordance with the relevant rules of the CBRC.
(2) Secondly, the balance of adjusted on-balance sheet assets is calculated as follows:
- exchange rates, interest rates and other derivative products are calculated according to the current exposure method set out in the annex to the Measures; and
- other on-balance sheet assets are included in the balance of adjusted on-balance sheet assets after provisions specifically made for that capital are deducted.
(3) Thirdly, the balance of adjusted off-balance sheet items is calculated as follows:
- the unconditionally revocable commitments in the off-balance sheet items are calculated at a credit conversion factor of 10%; and
- other off-balance sheet items are calculated at a credit conversion factor of 100%.
In particular, an unconditionally revocable commitment means a commitment, as set out in a written agreement, that a commercial bank has the right to revoke unconditionally at any time without prior notice, and that such revocation does not cause any disputes, litigations or costs to the bank.
Moreover, when commercial banks calculate the leverage ratios of their consolidated statements, the scope of consolidated statements and the method of calculation are determined according to the rules of the CBRC regarding the calculation of capital adequacy ratio of consolidated statements.
Supervision and administration
According to the Measures, the board of directors of commercial banks should take the ultimate responsibility for the management of leverage ratios, while the senior management staff of commercial banks are responsible for carrying out the management of leverage ratios.
Commercial banks should set a target leverage ratio which is not lower than the minimum regulatory requirements, and submit to the CBRC a leverage ratio report on consolidated and unconsolidated statements on a regular basis.
Commercial banks should disclose information on the leverage ratios in their principal places of business within four months after the end of each fiscal year. Such information should include the level of leverage ratio, tier 1 capital, tier 1 capital deductibles, balance of adjusted on-balance sheet assets, balance of adjusted off-balance sheet items and balance of adjusted on- and off-balance sheet assets. Commercial banks should make sure that shareholders and stakeholders are able to access the relevant information promptly.
The CBRC can take corrective measures against a commercial bank whose leverage ratio is below the minimum regulatory requirements by asking the bank:
(1) to replenish tier 1 capital within a deadline;
(2) to control the rate of growth in on- and off-balance sheet assets; or
(3) to reduce the size of on- and off-balance sheet assets.
If the bank fails to make the required corrections within the deadline, or the bank’s acts seriously jeopardize the stable operation of commercial banks and the legitimate interests of depositors and other clients, the CBRC has the right to take the following corrective measures according to the provisions of the PRC Regulation of the Banking Industry Law:
(1) order the bank to suspend part of its business, and cease the approval of the commencement of any new business;
(2) restrict the bank from distribution of dividends and other income;
(3) withdraw approval of the establishment of any new branch;
(4) order the controlling shareholders to transfer their equity interests or restrict the rights of relevant shareholders;
(5) order a change in the directors or senior management staff or restrict their rights; or
(6) other measures as stipulated by law.
Moreover, the CBRC can also impose administrative penalties on commercial banks according to law.
Miscellaneous clauses
The Measures say policy banks, financial asset management companies, rural cooperative banks, rural credit cooperatives, finance companies of business groups, financial leasing companies, car finance companies and consumer finance companies should refer to the Measures.
With respect to the deadline, systemically important banks approved by the CBRC should meet the minimum leverage ratio requirement before the end of 2013, while non-systemically important banks should meet the requirement by the end of 2016.
During the transition period, any banks that fail to satisfy the requirement should formulate a plan for meeting the standard and report the plan to the CBRC.
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Business Law Digest is compiled with the assistance of Haiwen & Partners. The authors can be emailed at baochen@haiwen-law.com. Readers should not act on this information without seeking professional legal advice.
