Chapter I General Provisions
Article 1 The Guidelines on the Categorization of Banking Book Credit Risk Exposures of Commercial Banks (hereinafter referred to as “these Guidelines”) are formulated to guide the categorization of banking book credit risk exposures of commercial banks, so as to enhance their credit risk management, pursuant to the Law of the People’s Republic of China on Banking Regulation and Supervision, the Law of the People’s Republic of China on Commercial Banks as well as other applicable laws and regulations.
Article 2 These Guidelines shall apply to the Basel II (also known as “the International Convergence of Capital Measurement and Capital Standards: A Revised Framework” or “the New Basel Accord”) banks as defined in the Guidelines on the Implementation of New Basel Accord by China’s Banking Sector and other commercial banks that intend to implement the Basel II on a voluntary basis.
Article 3 A commercial bank adopting the internal rating-based approach to measure credit risk capital requirements shall categorize its banking book credit risk exposures (banking book exposures) into broad classes of assets with different underlying credit risk characteristics in accordance with these Guidelines. The classes of assets are sovereign exposures, financial institution exposures, retail exposures, corporate exposures, equity exposures and other exposures.
Article 4 Banking book exposures as mentioned in these Guidelines refer to the part of credit risks exposed to all on and off-balance-sheet financial instruments not captured in the trading book.
The trading book includes items as follows: positions in financial instruments that commercial banks take on with the intention of short- term resale or benefiting in the short term from actual or expected differences between the buying and selling prices or from other price or interest rate variations; positions that arise from the execution of trade orders from customers and market making; positions taken in order to hedge other elements of the trading book.
Article 5 The categorization of banking book exposures shall adhere to the following principles:
(1) Materiality. Based on the materiality of business area and asset class, a commercial bank shall categorize its assets into different classes. Those assets that are immaterial in terms of scale and risk level can be categorized in a simplified or consolidated way;
(2) Timeliness. Based on the types of obligor and facility de facto, a commercial bank shall determine the category of the risk exposure in a timely manner;
(3) Continuity. The criteria for the categorization of banking book exposures of a commercial bank shall remain relatively stable, and any adjustment of the categorization of risk exposures shall be subject to its written policies and processes;
(4) Full coverage. All credit risk exposures in the banking book shall be categorized into corresponding classes.
Article 6 The China Banking Regulatory Commission (hereinafter referred to as “the CBRC”) shall conduct a supervisory review of the compliance and rationality of the categorization of banking book exposures of commercial banks in accordance with these Guidelines.
Chapter II Policies and Procedures for the Categorization
Article 7 Based on these Guidelines, a commercial bank shall formulate its own policies for the categorization of banking book exposures, clarify the procedures for the classification and adjustment of risk exposures and requirements for internal control, and improve the reporting system and MIS.
Article 8 A commercial bank shall determine the criteria and processes for the categorization of risk exposures according to the bank’s management framework, asset structure and risk characteristics. Where the categorization criteria of a commercial bank are inconsistent with the requirements of these Guidelines, such criteria shall be reported to the regulatory authorities for archival purposes.
Article 9 A commercial bank shall designate a department to take the lead in the categorization of risk exposures of the whole bank. Two relatively independent functions or departments shall take charge of the initiation and determination of risk exposures classification respectively.
Article 10 A commercial bank shall categorize risk exposures into the corresponding classes according to its written categorization criteria. Exposures that do not meet the criteria for sovereign exposures, financial institution exposures, retail exposures, equity exposures or other exposures but take on credit risk shall be included in the corporate risk exposures.
Article 11 A commercial bank shall adjust its risk exposure classes according to the changes in the risk exposure characteristics. The adjustment of risk exposure classes shall be completed within half a year after the emergence of the characteristics that marks the need for adjusting risk exposure classes.
Article 12 A commercial bank shall establish an internal reporting system for the categorization and adjustment of banking book exposures, and shall report the categorization and risk profiles to the Board of Directors and senior management on a regular basis.
Article 13 A commercial bank shall mark the risk exposure class of each business operation in the management information system(MIS).
Article 14 A commercial bank shall establish an internal audit system for the categorization of banking book exposures, so as to audit the implementation of the categorization of banking book exposures on a regular basis.
Chapter III Sovereign Exposures
Article 15 Sovereign exposures refer to the claims on a sovereign state or economic entity region and its central bank, a non-central government public sector entity, as well as those multilateral development banks, the Bank for International Settlements, the International Monetary Fund and so on.
Article 16 “Multilateral development banks (MDBs) as mentioned in the preceding article include: the World Bank Group (WBG), the Asian Development Bank (ADB), the African Development Bank (AfDB), the European Bank for Reconstruction and Development (EBRD), the Inter-American Development Bank (IDB), the European Investment Bank (EIB), the Nordic Investment Bank (NIB), the Caribbean Development Bank (CDB), the Islamic Development Bank (IDB) and the Council of Europe Development Bank (CEDB).
Chapter IV Financial Institution Exposures
Article 17 Financial institution exposures refer to the claims on financial institutions. A commercial bank shall categorize the financial institution exposures into banking institution exposures and non-banking financial institution exposures.
Article 18 Banking institutions as mentioned in these Guidelines include the commercial banks, urban credit cooperatives and other financial institutions taking public deposits that are established within the territory of the People’s Republic of China, as well as the deposit-taking financial institutions registered outside the territory of the People’s Republic of China and approved by the financial regulatory authorities in the home country or region.
Article 19 Non-banking financial institutions as mentioned in these Guidelines include the securities companies, insurance companies, trust companies, finance companies, financial leasing companies, auto financing companies, currency brokerage companies, asset management companies, fund companies and other institutions that are established with the approval and are subject to the supervision of the financial regulatory authorities.
Chapter V Retail Exposures
Article 20 Retail exposures shall have all of the following characteristics:
(1) The exposure is to one or more natural persons ;
(2) Large number of exposures and low value of individual exposures; and
(3) Management on a pooled basis.
Article 21 Retail exposures are divided into three categories, namely: residential mortgage loans, qualifying revolving retail exposures and other retail exposures. A commercial bank is encouraged to make more detailed sub-categories on the above-mentioned basis according to the bank’s own business conditions and management practices.
Article 22 Residential mortgage loans are loans used for purchasing residential properties and secured by the purchased properties .
Article 23 Qualifying revolving retail exposures refer to revolving and unsecured loans granted to individuals. In a qualifying revolving retail exposure, the maximum aggregated retail exposure to a single individual shall not exceed the threshold of RMB 1 million.
Article 24 Other retail exposures refer to the claims on natural persons other than the residential mortgage loans and qualifying revolving retail exposures.
Article 25 Corporate exposures with all of the following characteristics can be included in the category of “other retail exposures”:
(1) Aggregated exposures to a single obligor do not exceed RMB 5 million and the total assets of the obligor do not exceed RMB 10 million, or aggregated exposures do not exceed RMB 5 million and the annual sales revenues of the obligor do not exceed RMB 30 million;
(2) Exposures are managed on a pooled basis within the commercial banks.
Chapter VI Corporate Exposures
Article 26 Corporate exposures refer to a commercial bank’s claims on companies, partnerships, proprietorships and other non-natural persons, but do not include claims on sovereignty, financial institutions or corporate clients included in the retail exposures as defined in these Guidelines.
Article 27 According to the type of obligor and risk characteristics, corporate exposures are categorized into small- and medium-sized entities(SME) exposures, specialized lending and general corporate exposures.
Article 28 SME exposures refer to a commercial bank’s claims on corporate obligors with annual sales revenues (arithmetic mean value of sales revenues in recent three years) of no more than RMB 300 million.
Article 29 Special lending refer to claims within corporate exposures possessing all of the following characteristics:
(1) The obligor is usually a special purpose entity established for physical asset financing or operation;
(2) The obligor basically has no other material assets or business and has no ability of repaying independently other than revenues from financed assets;
(3) Contract arrangement grants certain control to the lender as to assets formed via financing and the arising revenues.
Article 30 Specialized lending can be sub-categorized into project finance, object finance, commodities finance and loans for income-producing real estate.
Article 31 Project finance shall have all of the following features in addition to the characteristics of specialized lending:
(1) The purpose of financing is usually to build a single project or one set of large production units or infrastructure projects, including re-financing for construction in progress;
(2) The obligor is usually a corporate legal entity established to build and operate the project or for project finance;
(3) Sources of repayment mainly include sales revenues, subsidy revenues or other revenues generated from the project, generally with no other sources of repayment.
Article 32 Object finance shall have all of the following features in addition to the characteristics of specialized lending:
(1) The obligor seeks financing to purchase specific physical assets, such as ships, aircrafts and rail transportation tools, etc.;
(2) Sources of repayment mainly include cash flows generated from special assets used for financing, mortgage or delivered to lenders. The cash flows can be realized by one or several rental or leasing contracts signed with third parties.
Article 33 Commodities finance shall have all of the following features in addition to the characteristics of specialized lending:
(1) Commodities finance refers to structured short-term lending to finance reserves, inventories or receivables of commodities that can be traded at the exchange (such as crude oil, metal or crops);
(2) The obligor has no other physical assets and mainly relies on commodity sales revenues as the source of repayment;
(3) The rating of the exposure, mainly reflects its self-liquidating nature and the lender’s ability to structure the transaction rather than the credit quality of the borrower.
Article 34 Loans for income-producing real estate shall have all of the following features in addition to the characteristics of specialized lending:
(1) The obligor is usually a company devoted to developing financing projects, or an operating company engaged in real estate construction or with real estate;
(2) The purpose of financing is to develop, sell or rent out real estate (such as office buildings, retail spaces, multifamily residential buildings, industrial and warehouse spaces and hotels for leasing), as well as to classify, develop and reserve lands etc.;
(3) The primary sources of repayment come from rental payments, sales revenues or land granting fees of real estate formed from loans.
Article 35 General corporate exposures refer to corporate exposures other than SME exposures and specialized lending.
Chapter VII Equity Exposures
Article 36 Equity exposures refer to shareholders’ equity directly or indirectly held by a commercial bank.
Article 37 Financial instruments included in equity exposures shall meet all of the following requirements:
(1) The main source of revenues by holding the financial instruments is from future capital gains rather than profits to be generated over time;
(2) The financial instruments cannot be redeemed and do not embody an obligation on the part of the issuer, and
(3) The financial instruments shall have residual claims on the issuer’s assets or revenues.
Article 38 Financial instruments meeting any of the following conditions shall be included in equity exposures:
(1) Having the same structure with a commercial bank’s Tier 1 capital;
(2) Embodying an obligation on the part of the issuer and also meeting any of the following conditions:
a. The issuer can defer indefinitely the settlement of the obligation;
b.The obligation requires (or permits at the issuer’s discretion) settlement by issuance of a fixed number of the issuer’s equity shares;
c. The obligation requires (or permits at the issuer’s discretion) settlement by issuance of a variable number of the issuer’s equity shares; and the value of the variable number of shares issued has a high co-relation with the value of the obligation;
d. The holder has the option to request the obligation be settled in equity shares unless either: (1)in the case of a traded instrument, the supervisor is content that the bank has demonstrated that the instrument trades more like the debt of the issuer than like its equity, or (2) in the case of non-traded instruments, the supervisor is content that the bank has demonstrated that the instrument should be deemed as a debt.
Chapter VIII Other Risk Exposures
Article 39 Purchased receivables refer to the assets that emerge when the seller transfers its current receivables or receivables to be generated according to its contracts with the buyer on the sales of commodities, products or labor to a commercial bank with or without recourse. Purchased receivables can be divided into two sub-classes: eligible purchased corporate receivables and eligible purchased retail receivables.
Article 40 Purchased retail receivables shall be classified as retail exposures while purchased corporate receivables may be classified as corporate exposures generally. A commercial bank can also treat eligible purchased corporate receivables as an individual exposure. Eligible purchased corporate receivables shall satisfy all the following requirements:
(1) The sales contract signed between the seller and the buyer is genuine, fair, legal and valid and the seller is able to offer a complete proof of debt for receivables;
(2) The seller is not a connected party of the commercial bank, and the receivables are not directly or indirectly originated by the commercial bank;
(3) Receivables generated from deals among the group’s companies or connected parties are not eligible receivables; and
(4) A commercial bank has claims on all proceeds from the pool of receivables or a pro rata interest in the proceeds.
Article 41 Securitization exposures refer to credit exposures that arise when a commercial bank is involved in securitization transactions. Securitization exposures may include but are not restricted to exposures arising from asset-backed securities, credit enhancements, liquidity facilities, interest rate or currency swap, credit derivatives and tranched guarantees.
Chapter IX Supplementary Provisions
Article 42 The CBRC is empowered to interpret and explain these Guidelines.
Article 43 These Guidelines shall come into effect as of October 1, 2008.
