The Chinese banking industry is facing three challenges following the release of the Basel II Accord, International Accounting Standards IRS39 clause and the US Sarbanes-Oxley Act. The remark was made by Liu Mingkang, Chairman of China Banking Regulatory Commission (CBRC), at a seminar held by the Bank and Finance Institute of the Chinese Academy of Social Sciences for the release of China Finance and Law 2005.

Liu Mingkang said the three challenges "are not fictional, but real; not remote, but rather close; not superficial, but of profound impact". He said the Basel II Accord is a more comprehensive capital supervision and regulation framework that is more risk-sensitive. It comprises three pillars - the minimum capital requirements, supervisory review by regulatory authorities on capital adequacy and information disclosure. Particularly in minimum capital requirements the CBRC opted for internal ratings-based approach in light of China's reality. However, this method is also facing challenges.

Liu said to do this there must be sound data, absolutely reliable IT system. Meanwhile this kind of sound data must cover at least two economic cycles to have a relatively reliable conclusion. The problem is that two economic cycles in China is usually ten years.

The second challenge comes from the International Accounting Standards. The United States abruptly decided to adopt the IRS39 clause last year, which affects not only the banking industry, but also the securities, insurance and all businesses. Liu believes the impact is twofold. The first is the impact on the provision level of all businesses. The second is on the profit and loss statement of all businesses.

The Sarbanes-Oxley Act is also a big challenge. The most crucial in the act is section 404. The clause requires all listed companies to submit each year a report on behalf of the Board of Directors and signed by independent director, which identifies the listed company's material weaknesses in financial management and other chief managerial aspects. The Sarbanes-Oxley Act meanwhile demands the independence and effectiveness of external auditor. In addition to the report identifying its own weaknesses required of the listed company, the external auditor must submit an independent report.

Liu Mingkang said judging from the trend of changes of the three international rules international competition standards will become increasingly complex. It requires Chinese financial institutions to seriously study and find a balance point between the implementation complexity of international standards and high costs.

According to the promises made when joining the WTO Chinese banking industry does not have to open completely until the end of 2006. "If you think competition will not start until next year then you are fooled. As a matter of fact a war without smoke of gunpowder has already begun." said an official with the People's Bank of China.

Source: People's Daily