Capital Adequacy and Risk Management

Chinese banks have generally been undercapitalised (Table 8.1). As shown by Brehm and Macht (2005), the ratio of capital to assets (used as a proxy for the Basel I ratio) for Chinese banks declined steadily from 12% in 1985 to its lowest level in 1997 at 2% increasing a little in 2003 to 4.3%. The Basel capital ratio has been published by banks in recent years only and is increasing as banks are more and more conscious of the necessity and the implications of the capital ratio for their business. After their second recapitalisation exercise, CCB and BoC can now boast capital ratios of 11.3 and 10% respectively at the end of 2004. Most JSCBs show capital ratios just above the regulatory required 8%. Smaller banks such as CCBs do not publish their capital ratios and many are thought to be heavily undercapitalised.