The CBRC recently issued Guidelines on the Regulatory Capital Requirements of Asset Securitization Exposure of Commercial Banks (hereinafter referred to as the Guidelines). Currently, the Guidelines is fully applicable to Basel II banks (banks that have been approved by the CBRC to implement the New Capital Accord—Basel II), non-Basel II banks may take it as a reference.

The Guidelines has 5 chapters, 57 articles and 5 attachments in total. The first chapter General Provisions clearly defines the scope of application and basic principles of the Guidelines, and states the applying principles, calculation methods and regulatory capital cap. The second chapter is about the transfer of credit risks and regulatory capital calculation, clarifying the criteria for judging whether traditional and synthetic asset securitization can transfer major credit risks and thus, obtain partial or overall regulatory capital deduction, and providing principles pertinent to liquidation and repo arrangements and capital calculation of hidden support. The third chapter is on the standardization of asset securitization. The fourth chapter provides the internal rating method of asset securitization. The fifth chapter is the supplementary articles, in which the right of interpretation, effective date and relevant vocabulary and terms are clearly defined.

The Guidelines is aimed to guide the banks to conduct securitization for good economic causes and regulate the capital requirements for associated risk exposures so as to avoid overvalue of capital adequacy ratio.

The CBRC also addresses some concerned questions of the press regarding the Guidelines.

Q: What is the background of issuing the Guidelines?

A: Dating back to 2005, the CBRC issued the Administration of Pilot Projects for Securitization of Credit Assets Procedures. During the recent financial crisis, many problems of regulatory policies for global asset securitization were exposed. Therefore, the Basel Committee has made adjustments to the New Capital Accord and published the formal revised version on July 2009. In order to timely follow the latest requirements and methods of the New Capital Accord of Basel II, the CBRC issued the Guidelines.

Q: What are the calculation methods stated in the Guidelines?

A: The Guidelines are based on relevant calculation methods of the New Capital Accord with consideration of the actual situation of China’s commercial banks. The principle is that the capital requirement formula for underlying assets determines the capital requirement formula for asset securitization exposure. According to this principle, the following methods are defined in the Guidelines:

1.The standard method. By this method, the risk weight is determined by external credit rating.

2.The internal rating method. This method includes basic rating method and regulatory formulas.

Q: What contents of the revised version of the New Capital Accord are included in the Guidelines?

A: The Guidelines include all relevant adjusted details of the revised version of the New Capital Accord, including the increase of risk weight of asset re-securitization exposure. If a commercial bank provides credit enhancement for asset securitization and such enhancement has already been reflected in the external rating, the commercial bank should measure the regulatory capital requirements in accordance with those applied to  unrated asset securitization exposure rather than by using external rating system. Commercial banks should make due diligence on the underlying assets. Besides, the credit conversion factor for liquidity facility has been increased, and capital concessions on qualified liquidity facility under market turbulence have been eliminated.

Q: What are the impacts on commercial banks after the issuance of the Guidelines?

A: The Guidelines are issued for standardizing the regulatory capital requirements of asset securitization exposure of commercial banks. According to the structures of the securitization, the risks undertaken by the banks should be analyzed and corresponding capital requirements should be determined. Some banks start securitization business by simply believing that asset securitization would lower the capital requirements. This should be avoided. We should also avoid unnecessary cost generated by inappropriate capital requirements.

Q: When drawing up the Guidelines, what kind of adjustment was made based on the opinions solicited during the consultation process?

A: The CBRC initiated 5 rounds of consultation on the Guidelines on November 2007, June 2008, November 2008, December 2008 and August 2009 respectively, and received 194 pieces of feedback. The CBRC has incorporated most of the reasonable advices and made adjustments of the Guidelines in accordance with the feedbacks and latest adjustments of the New Capital Accord.

Q: How should commercial banks get prepared for the implementation the Guidelines?

A: Commercial banks should:

1. Study the Guidelines and understand the principles and technical problems of the Guidelines, and make sure relevant policies and procedures, including accounting and IT systems are accommodative to the implementation of the Guidelines.

2. Cooperate with the CBRC to carry out the quantitative impact study (QIS) and provide sufficient information for the CBRC to calculate regulatory capital requirements of asset securitization exposure.

3. Implement the regulatory capital requirements issued by the CBRC and timely, accurately disclose relevant information as guided by the CBRC.