Banks ordered to raise liquidity coverage ratios

Chinese commercial banks' liquidity coverage ratios must reach 100 percent by 2018 to strengthen them against the risks of credit crunches, the China Banking Regulatory Commission said on Wednesday in a new liquidity management regulation.

The target ratio is set at 60 percent this year, rising by 10 percentage points annually until 2018, the same transitional period specified in the Basel III accord.

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Liqudity: a thorny issue

The liquidity coverage ratio measures banks' ability to guard against liquidity risks when they cannot obtain adequate assets at reasonable costs to pay due debts, make other payments and maintain normal operations.

"Some banks have shown decreasing stability in capital resources and low liquidity," said the news release on the CBRC's website.

"As interdependence among financial institutions grows, problems stemming from individual banks or certain regions tend to cause tight liquidity in the entire banking system."

Last June, domestic banks were hit by a severe credit crunch. The Shanghai Interbank Offered Rate surged to 8.3 percent in early June from 2 to 3 percent in May.

The People's Bank of China did not inject capital to ease liquidity. Instead, the central bank called on other banks to tap into their existing capital.

The CBRC has also specified that banks' loan-to-deposit ratios can't exceed 75 percent. The liquidity ratio must be at least 25 percent.

The regulation is applicable to all Chinese commercial banks, including foreign and Chinese-foreign joint stock banks, with more than 200 billion yuan ($33 billion) in assets.

"The calculation of the LCR is very complicated. Small banks may not even have the statistics needed," said Li Wenhong, deputy director of the policy department of the CBRC.

"Even large banks have to improve their accounting systems to generate all the statistics for the calculation.