Liquidity risk management for Chinese banks to be enhanced

China's banking regulator has begun soliciting public opinions on a new draft in a bid to improve banks' liquidity risk management and safeguard the safety and stability of China's banking system, reports Xinhua News.

The draft is expected to be implemented on Jan. 1, 2012, according to a statement by the China Banking Regulatory Commission.

The CBRC draft arrives at a time when many Chinese banks face a liquidity crunch, as the government has implemented tightening measures this year to tame soaring inflation.

"This underlined an evident defect in their liquidity risk management scheme, which failed to fit the principle of being prudent when managing liquidity risks," the CBRC said.

With the rapid development of financial innovation and financial markets in recent years, commercial banks are under greater pressure to manage liquidity risks, the CBRC said.

The draft gives equal priority to both liquidity risk quality and quantity, said the CBRC.

The draft introduced a multi-dimensional, multi-scenario liquidity risk supervisory and monitoring system based on a reference to the Basel III framework, a set of new global banking requirements agreed upon by G20 leaders last year.

The draft ordered regulators and commercial banks to closely monitor and study the adjustment of macroeconomic and financial policies, as well as their impact on banks' liquidity.

The CBRC said the draft will apply the same supervisory requirements to all domestic and foreign banks, as well as other financial institutions.

As more Chinese banks are pursuing cross-border business and syndicating, the CBRC stressed requirements for liquidity risk management in the banks' consolidated statements and has asked the banks to separately list major foreign currency-denominated liquidity risks.

The draft also raised stress test requirements and emergency plans to make them more targeted and workable.

New supervisory indicators such as the liquidity coverage ratio and the net stable funding ratio are also included in the draft.

According to the CBRC, commercial banks will have to meet the new LCR regulatory standards by the end of 2013 and fit the NSFR requirements by the end of 2016.