Regulation Governing Capital Adequacy of Commercial Banks

Chapter I General Provisions

Article 1 Pursuant to the “Law of the People’s Republic of China (PRC) on Banking Regulation and Supervision”, the “Law of the People’s Republic of China on Commercial Banks” and the “Regulations of the People’s Republic of China on Foreign Financial Institutions”, this regulation is formulated for the purpose of strengthening the supervision of capital adequacy in commercial banks so as to help commercial banks operate in a safe and sound manner.

Article 2 This regulation shall be applied to commercial banks incorporated in the PRC, including Chinese-funded commercial banks, solely-foreign-funded commercial banks and Sino-foreign joint-equity commercial banks.

Article 3 Capital adequacy ratios as referred to in this regulation are the ratios of capitals held by the commercial banks and defined by the regulation to risk-weighted assets of commercial banks.

Article 4 The calculation and measurement of capital adequacy ratios are on the basis of adequate provisions for various losses, including loan losses.

Article 5 The amount of capital in commercial banks shall be sufficient enough to cover credit risk and market risk.

Article 6 Commercial banks shall calculate and measure their capital adequacy on both a stand-alone basis and a consolidated basis.

Article 7 The required minimum ratios shall be no less than 8% for capital adequacy and 4% for core capital adequacy.

Article 8 The China Banking Regulatory Commission (CBRC) will follow this regulation with respect to reviewing the capital adequacy and capital management of commercial banks.

Article 9 Commercial banks shall disclose capital adequacy information in line with this regulation.  

Chapter II Calculation and Measurement of Capital Adequacy Ratios

Article 10 In the calculation and measurement of capital adequacy ratios on a consolidated basis, the scope of consolidation shall include the following:

·        financial institutions in which over 50% of the voting shares are owned by commercial banks, which include:

 ‐financial institutions in which over 50% of the voting shares are  directly owned by the bank;

‐financial institutions in which over 50% of the voting shares are indirectly owned by the bank through subsidiaries; and

‐financial institutions in which over 50% of the voting shares are directly and indirectly jointly owned by the bank.

·        investments representing less than 50% of the voting shares of financial institutions, and meeting one of the following conditions:

‐ the bank owns more than 50% of the voting shares of financial institutions through agreements with other investors;

‐ the bank has the power to control the financial and operating policies of financial institutions in accordance with articles of association or agreements;

‐ the bank has the power to appoint and remove majority members of boards of directors or other decision making bodies of financial institutions; and

‐ the bank owns more than 50% of the controlling interest in boards of directors or other decision-making bodies of financial institutions;

The following institutions shall not be included for consolidation:

·        financial institutions that have been closed or declared to be bankrupted;

·        financial institutions that have been declared to be in liquidation in accordance with the bankruptcy procedures;

·        financial institutions of which more than 50% of the voting shares are owned as short term investment and will be disposed of within a year; and

·        overseas subsidiaries of financial institutions whose movement of capital is controlled by exchange restrictions of host countries or by unexpected events.

Article 11 The formulae for the capital adequacy ratios are as follows:

Capital adequacy ratio = (total capital – deductions) / (risk-weighted assets + 12.5 * capital charge for market risk)

Core capital adequacy ratio = (core capital – deductions) / (risk-weighted assets + 12.5 * capital charge for market risk)

Article 12 The total amount of capital shall consist of core capital and supplementary capital.

Core capital shall consist of paid-up capital/common stocks, reserves, capital surplus, retained earnings and minority interests.

Supplementary capital shall consist of revaluation reserves, general loan-loss reserves, preference shares, convertible bonds and long-term subordinated debt.

Article 13 The amount of supplementary capital shall not exceed 100% of core capital. Long-term subordinated debt in supplementary capital shall not exceed 50% of core capital.

Article 14 The following items shall be deducted from the total capital base when calculating the capital adequacy ratio:

·goodwill;

·equity investments in the unconsolidated financial institutions; and

·equity investments on commercial real estate and equity investments in business enterprises.

Article 15 The following items shall be deducted from the core capital base when calculating the core capital adequacy ratio:

·goodwill;

·50% of the equity investments in the unconsolidated financial institutions; and

·50% of equity investments on commercial real estate and 50% of equity investments in business enterprises.

Article 16 Specific provisions shall be deducted from the book value of loans when commercial banks calculate risk-weighted assets. Other provisions for impairment losses shall also be deducted from the book value of relevant assets items.

Article 17 Risk weights of foreign claims owned by commercial banks shall be based on the ratings of external credit assessment institutions for the sovereigns or regions. In case there is a discrepancy in ratings for the same sovereign or region, the less favorable rating shall prevail.

·For claims on foreign central governments and central banks, where the rating for the sovereign or region is AA- or higher, the risk weight is 0%. Otherwise, the risk weight is 100%.

·For claims on foreign banks or securities firms, where the rating for the sovereign or region of incorporation is AA- or higher, the risk weight is 20%. Otherwise, the risk weight is 100%.

·For claims on public-sector entities invested  by foreign central governments, where the rating for sovereign or region is AA- or higher, the risk weight is 50%. Otherwise, the risk weight is 100%.

Article 18 The risk weight of claims on multilateral development banks is 0%.

Article 19 The risk weight of claims on the Chinese central government denominated in both domestic and foreign currency is 0%.

The risk weight of claims on domestic public-sector entities invested by the Chinese central government is 50%.

Article 20 The risk weight of claims on domestically incorporated policy banks is 0%.

Article 21 For claims on other domestically incorporated commercial banks with an original maturity of four months or shorter, the risk weight is 0%. Otherwise, the risk weight is 20%.

Article 22 The risk weight is 0% for claims on specific debts issued by the domestically incorporated financial asset management companies (AMCs) to purchase the state-owned banks’ non-performing loans. The risk weight is 100% for other claims on these AMCs.

Article 23 The risk weight is 100% for claims on business enterprises, individuals or all other assets.

Article 24 The risk weight for residential mortgage is 50%.

Article 25 The following financial instruments can serve as risk mitigants.

·cash;

·gold;

·bank deposits;

·treasury bonds issued by the Ministry of Finance of the PRC;

·papers issued by the People’s Bank of China(PBC);

·bonds and papers issued by and bills accepted by policy banks and commercial banks incorporated in the PRC;

·bonds and papers issued by and bills accepted by the public-sector entities, which are invested by the Chinese central government.

·bonds issued by the central governments, bonds and papers issued by and bills accepted by the central banks, commercial banks and public-sector entities incorporated in countries and regions with AA- or higher ratings; and

·bonds issued by multilateral development banks;

Loans secured by the above financial instruments shall have the same risk weights as the instruments. In the case of partially secured loans, the secured part gets the correspondingly lower risk weight.

Article 26 The following guarantors are eligible for risk mitigation:

·policy banks and commercial banks incorporated in the PRC;

·the Chinese government agencies only approved by the State Council, for on-lending of loan proceeds from foreign governments and international financial institutions.

·public-sector entities invested by the Chinese central government.

·central governments, central banks and commercial banks incorporated in countries and regions with AA-  or higher ratings; and

·multilateral development banks;

The risk weights of loans fully guaranteed by the above guarantors shall be the same as those of direct claims on these guarantors. In the case of partially guaranteed loans, the guaranteed portion obtains the lower risk weight accordingly.

Article 27 Commercial banks shall set aside capital for credit risk for off-balance sheet items. The banks shall calculate risk-weighted assets according to the following steps:

·converting each off-balance sheet item to credit equivalents by multiplying the nominal principal amounts by a credit conversion factor; and

·calculating risk-weighted assets according to the risk weight of  the counterparty.

The current exposure method is used to calculate the risk-weighted assets of foreign exchange contracts, interest rate contracts and other derivative contracts.

Article 28  Commercial banks shall set aside capital for market risk. Market risk is defined as the risk of losses in on- and off-balance sheet positions arising from movements in market prices. The risks as referred to in this regulation are:

·the risks pertaining to interest rate-related instruments and equities in the trading book; and

·foreign exchange risk and commodities risk throughout the bank.

Article 29 Commercial banks should set up the trading book according to the definition of this regulation. All the items in trading book should be marked to market.

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 30 Commercial banks whose trading book positions are more than 10℅ of the total on- and off-balance sheet assets or more than 8.5 billion RMB are subject to market risk capital charge.

Article 31 Commercial banks exempted for capital charge for market risk shall report their market risk positions to the CBRC on a quarterly basis. The CBRC will decide on whether banks should be subject to market risk capital charge.

Article 32 Commercial banks should calculate and measure capital charge for market risk in line with the standardized measurement method in this regulation. Commercial banks can also use internal models to measure market risk subject to the review and approval by the CBRC.

Chapter III  Supervisory Review of Capital Adequacy and Intervention

Article 33 The board of directors of each bank shall assume the ultimate responsibility for capital adequacy management. The board has the responsibility for defining the objectives of capital management and risk appetite, and formulating a comprehensive plan to keep capital at an adequate level. In case a board of directors does not exist, the president shall assume the responsibility.

Article 34 The senior management of commercial banks shall assume the responsibility for the implementation of capital adequacy objectives, which includes stipulating rules on capital adequacy management. With a view to ensuring effective execution of all supervisory measures, the bank shall improve its ability of identifying, measuring and reporting credit risk and market risk, conduct a periodic analysis of the capital adequacy ratios, set up capital management mechanism and strengthen the monitoring of the capital assessment program.

Article 35 Commercial banks shall report capital adequacy to the CBRC on both a stand-alone basis and a consolidated basis. The capital adequacy ratio on a consolidated basis shall be reported semi-annually, and ratio on a stand-alone basis quarterly. In case of material events that affect the capital ratio, the bank shall inform the CBRC in a prompt manner.

Commercial banks shall report to the PBC on capital adequacy while reporting to the CBRC.

Article 36 The CBRC shall review and evaluate banks’ capital adequacy through on-site examination and off-site surveillance, specifically:

·a review of the policies and procedures relating to capital adequacy;

·a review of the comprehensive plan to keep capital at an adequate level and the banks’ capability of monitoring capital adequacy;

·a review of the banks’ credit risk and market risk exposures; and

·a review of the banks’ compliance with this regulation in respect of setting the trading book and  valuing the trading book items.

Article 37 The CBRC has the authority to require a higher capital adequacy ratio than the minimum for a particular individual bank in consideration of its risk profile and the capability of risk management.

Article 38 Commercial banks are classified by the CBRC into three categories on the basis of their capital adequacy status:

·adequately capitalized banks: the capital adequacy ratio is not less than 8%, and the core capital adequacy ratio is not less than 4%;

·undercapitalized banks: the capital adequacy ratio is less than 8%, or the core capital adequacy ratio is less than 4%; and

·significantly undercapitalized banks: the capital adequacy ratio is less than 4%, or the core capital adequacy ratio is less than 2%.

Article 39 The CBRC encourages adequately capitalized banks to operate in a safe and sound manner. The CBRC has the authority to intervene at an early stage to prevent bank capital from falling below the minimum levels. The intervention actions may at least include the following:

·requiring banks to improve risk management;

·requiring banks to enhance risk controls;

·requiring banks to strengthen the analysis and forecast of capital adequacy; and

·requiring banks to submit and implement an acceptable capital maintenance plan, and restricting banks from engaging in high risk activities.

Article 40 For undercapitalized banks, the CBRC will take the following corrective actions:

·issuing a supervisory letter of notice, which includes a description of the bank’s capital adequacy, corrective actions to be taken, timeframe for implementation;

·requiring banks to submit and implement an acceptable capital restoration plan within two months after receiving the supervisory letter of notice from the CBRC;

·requiring banks to restrict the asset growth;

·requiring banks to reduce risk assets;

·requiring banks to restrict the purchase of fixed assets;

·requiring banks to restrict dividend payouts or other forms of payment to shareholders; and

·restricting banks from setting up new branches or starting new products and services.

In addition, based on the review of the risk profile and capital restoration of undercapitalized banks, the CBRC has the authority to require the commercial bank to suspend all but low-risk activities, or stop setting up new branches or starting new products and services.

Article 41 For significantly undercapitalized banks, the CBRC will take further actions in addition to actions listed in Article 40:

·requiring removal of senior management; and

·taking over the banking institution, facilitating the restructuring of the institution, or closing the institution in accordance with relevant laws and regulations.

For significantly undercapitalized banks, the CBRC shall take into account various external factors and exercise authority to handle the situation with a view to achieving the best results.

Chapter IV Disclosure

Article 42 Commercial banks’ boards of directors are responsible for the disclosure of information in respect of capital adequacy. The information to be disclosed must be approved by the board.

Article 43 Commercial banks shall disclose information in respect of capital adequacy periodically. The information shall cover the following five areas:

·objectives and policies of risk management;

·scope of application;

·capital;

·capital adequacy ratios; and

·credit risk and market risk.

In case that the disclosure of certain items of information as required by this regulation may reveal commercial confidential information, banks need not disclose those specific items. But more general information must be disclosed, together with the explanation of why certain specific items have not been disclosed.

Article 44 Commercial banks shall disclose the information in respect of capital adequacy within four months after the end of each accounting year. In case the disclosure cannot be made for special factors, the bank shall apply to the CBRC for delay of disclosure at least fifteen days in advance.

Article 45 Commercial banks shall submit the relevant capital adequacy information to the CBRC prior to disclosure.

Article 46 Commercial banks shall disclose the information required by this regulation at major operating sites and make sure that the shareholders and relevant stakeholders obtain the information timely.

Chapter V Supplementary Provisions

Article 47 The calculation, review and information disclosure of capital adequacy ratios in solely-foreign-funded and Sino-foreign joint-equity finance companies shall follow this regulation. The foreign bank domestic branches shall measure risk-weighted assets denominated in RMB in accordance with this regulation.

Article 48 Annex 1, Annex 2, Annex 3, Annex 4 and Annex 5 are integral parts of this regulation, which are as follows:

·Annex 1: Definition of capital

·Annex 2: Risk weights of on-balance sheet assets

·Annex 3: Credit conversion factors for off-balance sheet items and definitions

·Annex 4: The standardized measurement method for market risk capital charge

·Annex 5: Disclosure

Article 49 The notation AA- of Standard & Pool’s is used throughout this regulation, but it does not express the choice of any external credit assessment institution (ECAI) by the CBRC. Commercial banks can choose ECAIs at their discretion, but they should keep consistency in the use of ECAIs over time.

Article 50 Claims on foreign countries or regions include the claims on foreign central governments, central banks and other agencies equivalent to central governments. The definition of agencies equivalent to central governments is based on the definition of relevant home supervisors.

Article 51 The voting shares as referred to in this regulation are the shares whereby the holder can participate in the company management and have voting rights of making operating decisions.

Article 52 Public sector entities as referred to in this regulation are the operators involved in the provision of public services, which include the supply of water, power, heat, gas, post, communication and transportation services. These entities are mainly in the infrastructure sectors of the economy. They are normally set up with government fund, and the size of investment is quite significant.

Article 53  Commercial banks shall meet the minimum capital adequacy requirements by 1 January 2007. Banks shall formulate and implement a feasible phase-in plan to comply with the requirements during the transition period. The CBRC has the authority to take supervisory actions stipulated in Article 40 and 41 in light of the implementation of banks’ capital restoration plans.

Article 54 The power of interpretation of this regulation rests with the CBRC.

Article 55 This regulation shall come into effect on 1 March 2004.

Annex 1

Definition of Capital

1. Core Capital

Paid-up capital/common stock refers to the capital fully paid by commercial banks’ investors in accordance with the entities’ articles of association or agreed terms in the relevant contract and agreement.

Capital reserves include share premium, reserves arising from contribution by means of cash or non-cash asset, reserves arising from equity investment, exchange differences arising from the translation of foreign currency capital contribution, differences arising from connected transactions, and other capital reserves.

Capital surplus includes statutory surplus reserves, discretionary surplus reserves and statutory public welfare fund.

Retained earnings are commercial banks’ retained profit or loss carried forward from previous years.

Minority interests, being minority interests in non-wholly owned subsidiaries on consolidation included in the core capital, refer to the part of net operating results and net assets of subsidiaries which is not directly or indirectly attributable to the parent bank.

.

2. Supplementary Capital

Revaluation reserves With the approval of relevant authorities, positive differences between the fair value and the book value of fixed assets arising from the revaluation of commercial banks’ fixed assets are stated as revaluation reserves. These reserves are eligible for inclusion in the supplementary capital if the CBRC considers the revalued amount to be prudent. However, the amount to be included will not exceed 70% of the revaluation reserves.

General provisions are amounts set aside based on a certain percentage of the total amount of outstanding loans. These provisions are used to cover unidentified potential loan losses.

Preference shares are shares issued by commercial banks, which give priority to investors in the appropriation of profit or retained assets.

Convertible bonds are bonds issued by commercial banks in line with relevant legal processes, and could be converted into common stocks in accordance with the agreed terms within a specified period. Convertible bonds could be eligible for inclusion in supplementary capital only if the following conditions are met:

(1) Bonds are neither secured nor pledged by bank assets, and the right of claim of bondholders is subordinated to that of depositors and other ordinary creditors; and

(2) Bonds are not redeemable at the initiative of their holders, or by the issuer without the prior consent of the CBRC.

Long-term subordinated debt is subordinated debt with original fixed terms to maturity of at least five years. With the approval of the CBRC, ordinary long-term subordinated debt of commercial banks, which are neither guaranteed nor secured by bank assets, is eligible for inclusion in the supplementary capital. During the last five years to maturity, the amount to be stated as supplementary capital will be discounted by 20% of the face value each year. For example, a subordinated debt with an initial term of 10 years can be included in the supplementary capital at 100% of its face value in the sixth year, 80% in the seventh year, 60% in the eighth year, 40% in the ninth year and 20% in the last year.

Annex 3

Credit conversion factors for off-balance sheet items and definitions

1.Credit conversion factors for off-balance sheet items

Definitions of off-balance sheet items are as follows:

1)   Direct credit substitutes include general guarantees of indebtedness, forward acceptances and endorsements with character of acceptance.

2)      Certain transaction-related contingent items include bid bonds, performance bonds, prepay bonds and indwelling bonds.

3)      Short-term trade-related contingencies mainly refer to documentary credits collateralized by underlying shipment with priority to claim.

4)     Commitments with original maturity of up to one year, or which can be unconditionally cancelled at any time, include banks’ credit intention agreements.

5)     Sale and purchase agreements which credit risks remain with the bank, includes sale and repurchase agreements and asset sales with recourse.

2. Risk assets of exchange rate, interest rate and other derivative contracts

Exchange rate, interest rate and other derivative contracts mainly refer to the swap, option, future and precious metals trading. The amount of risk asset of these contracts can be calculated by the current exposure method. The risk asset of interest rate and foreign exchange rate contract is the sum of the replacement cost obtained by marking to market and an amount calculated on the basis of the total notional principal amount of its book value multiplied by different factors. Factors can be split by the residual maturity as follows:

 Annex 4

The Standardized Measurement Method for Market Risk Capital Charge

I.                   Interest rate risk

Interest rate risk covers risk of debt securities (both fixed-rate and floating-rate debt securities and instruments, negotiable certificates of deposit, non-convertible preference shares, and also convertible bonds which trade like debt securities), interest rate derivatives and debt securities derivatives in the trading book.

The capital charge for interest rate risk consists of two parts: one is for specific risk and the other is for general market risk:

1.      Specific risk

Specific risk charge is graduated in five broad categories as follows:

government       0.00℅ 

qualifying

0.25℅(residual term to final maturity 6 months or less)

1.00℅(residual term to final maturity between 6 and 24 months)

1.60℅(residual term to final maturity exceeding 24 months)

   other                 8.00℅

2.      General market risk

The capital charge for general market risk consists of three parts as follows:

(1) The vertical capital charge for the matched portion of weighted long and short positions in each time-band;

(2)   The horizontal capital charge for the matched portion of weighted long and short positions across different time-bands; and

(3)   The capital charge for weighted net long or short positions (absolute value) in the trading book.

The maturity method is applied to the calculation of capital charge for general market risk. Time-bands and weights are set out in Table 1. Time-zones and weights are set out in the Table 2.

The maturity method for calculating the capital charge for general market risk is as follows:

(1) Multiply the positions reported in each time-band by a risk factor shown in the Table 1;

(2) Multiply the matched portion of the weighted long and short positions in each time-band by 10℅ to get the vertical capital charge;

(3) Offset the weighted long and short positions in each time-band, resulting in weighted net positions of each time-band; in each time-zone multiply the matched portion of all time-bands’ weighted net positions by the first column of factors in the Table 2 to get the horizontal capital charge in each time-zone;

(4) Offset the weighted net positions of all time-bonds in each time-zone, resulting in weighted net positions of each time-zone; multiply the matched portion of every two time-zones’ weighted net positions by the second column of factor in the Table 2 to get the horizontal capital charge across different time-zones; and

(5) Offset the weighted net positions of all time-zones to get the weighted net long or short positions in the whole trading book.

Table 1: time-bands and weights

Table 2: time-zones and weights

3. Interest rate and debt bond derivatives

Interest rate derivatives include derivatives contracts and off-balance sheet instruments which react to changes in interest rates, e.g. interest rate futures, forward rate agreements (FRAs), interest rate and cross currency swaps, interest rate options and forward foreign exchange positions. Debt derivatives include bond futures and bond options.

Derivatives mentioned above should be first converted into positions in the relevant underlying and become subject to specific risk and general market risk charges as described above. Interest rate and cross currency swaps, FRAs, forward foreign exchange contracts and interest rate futures will not be subject to a specific risk charge. In the case of futures contracts where the underlying instrument is a debt security, or an index representing a basket of debt securities, a specific risk charge will be required according to the credit risk of the issuer.

II.                 Equity risk

Equity risk refers to the risk related to positions of equity and equity derivatives in the trading book. Equity is defined as all instruments that exhibit market behavior similar to equities  including common stocks (whether voting or non-voting), convertible securities that behave like equities and commitments to buy or sell equities.

1．Specific risk and general market risk

The capital charge for specific risk is the sum of various markets’ values, each of which equals to the value of multiplying the sum of the absolute value of the net positions of all equities in each market by 8℅.The capital charge for general market risk is the sum of the values, each of which equals to the value of multiplying the absolute value of the net matched position after offsetting of all equities in each market by 8℅.

2.Equity derivatives

Equity derivatives include forwards, futures and swaps on both individual equities and stock indices.

The derivatives should be converted into positions in the relevant underlying and become subject to specific risk and general market risk charges as described above.

III.               Foreign exchange risk

Foreign exchange risk refers to the risk related to the positions of foreign exchange (including gold) and foreign exchange derivatives.

1.      The capital charge for foreign exchange risk equals to the value of multiplying the overall net open position by 8℅.

The overall net open position equals to the sum of two items as follows:                                             

(1) the sum of the net long positions or the sum of the net short positions (absolute value) of the portfolio of foreign currency (gold is not included), whichever is the greater;  and

(2) the net position in gold.

2.      Foreign exchange derivatives

The derivatives should be converted into positions in the relevant underlying and become subject to specific risk and general market risk charges as described above.

IV. Commodities risk

Commodities risk refers to the risk related to the positions of commodities, commodity forwards, commodity futures and commodity swaps.

Commodities as referred to in this regulation are physical products which are or can be traded on a secondary market, e.g. precious metals (gold is not included), agricultural products and minerals (including oil).

The capital charge for commodities risk should be the sum of two items as follows:

(1) the result of multiplying the sum of  the absolute value of the net position of each category of commodities by 15℅; and

(2) the result of multiplying the sum of  the gross position of each category of commodities (long positions plus absolute values of short positions) by 3℅.

Commodity derivatives should be converted into notional commodities positions, and become subject to the commodity risk charge as described above.

V. Options risk

1.      Banks that solely use purchased options will be free to use the simplified approach.

(1) The capital charge for long cash and long put or short cash and long call will be the market value of the underlying of the option multiplied by the sum of specific and general market risk charges for the underlying less the amount the option in the money (if any), with the reduced capital charge bounded at zero.

(2) The capital charge will be the lesser of the market value of the underlying of the option multiplied by the sum of specific and general market risk charges for the underlying and the market value of the option.

(3) The capital charge for special risk and general market risk of the underlying instruments should be calculated according to the following table:

2.      Banks that also write options will be expected to use the Delta-plus method.

Capital charges resulted from the Delta-plus method include three parts:

(1) Multiply the market value of the underlying of the option by the option’s delta to get delta-weighted option position; then add the delta-weighted positions to the underlying instrument positions to calculate the capital charge.

(2) The capital charge for gamma risk

 For each individual option a gamma impact should be calculated as follows:

Gamma impact＝0.5×gamma×VU

Where, for options if the underlying instrument is

bond,

VU = the market value of the underlying instrument×the risk weight in the corresponding time-bond in Table 1;

interest rate,

VU = the market value of the underlying instrument×the assumed changes in yield in the corresponding time-bond in Table 1;

equity, equity indices, foreign exchange or gold,

VU = the market value of the underlying instrument×8%;

commodity,

VU = the market value of the underlying instrument×15%.

Add gamma impacts of all options on the same underlying instrument together to get the net gamma impact of the underlying instrument. Add the absolute values of these net gamma impacts together to get the total capital charge for gamma risk if the net gamma impact of the underlying instrument is minus. 

(3) Capital charge for Vega risk

capital charge for vega risk of a underlying instrument

=│(25% - the volatility of the underlying instrument * the sum of the Vegas for all options on the underlying instrument│

The total capital charge for Vega risk equals the sum of the capital charges for Vega risk of all underlying instruments.

 Annex 5

Disclosure

1. Objectives and strategies of risk management

The bank should disclose the following details:

·General strategy and process

·Organizational structure of risk management

·Scope and category of risk being reported and measured

·Policy and implementation of risk mitigation

2. Scope of Application

The bank should disclose the scope of application relevant to capital adequacy measurement in details:

·financial institutions included in the consolidation

·financial institutions not included in the consolidation

3. Capital

The bank should disclose the following items in details:

·The amount of core capital, with separate disclosure of:

(1)              paid-up capital/common stocks

(2)              reserves

(3)              capital surplus

(4)              retained earnings

(5)              minority interests

·The amount of supplementary capital, with separate disclosure of:

(1)              revaluation reserves

(2)              general provisions

(3)              preference stock

(4)              convertible bonds

(5)              long-term subordinated debt

·The amount of capital.

·The amount of deduction from capital base, with separate disclosure of:

(1)              goodwill

(2) equity investments in the unconsolidated financial institutions

(3) equity investments on commercial real estate and equity investments in business enterprises

·The amount of deduction from core capital base, with separate disclosure of:

(1)              goodwill

(2) 50% of the equity investments in the unconsolidated financial institutions

(3) 50% of equity investments on commercial real estate and 50% of equity investments in business enterprises

·The maturity, condition and level of seniority.

·Events which may cause capital base increasing/decreasing or organization separating/consolidating in reporting period.

·Significant equity investment events in reporting period.

4. Capital adequacy ratios

The bank should explain the capital strategy and capital adequacy assessing approach, and disclose the factors relevant to capital adequacy. The following items should be disclosed in details:

·The total amount of risk-weighted assets of on-balance sheet

·The total amount of risk-weighted assets of off-balance sheet

·The total amount of risk-weighted assets

·Capital charge for market risk

·Capital adequacy ratio and core capital adequacy ratio on a stand-alone basis

·Capital adequacy ratio and core capital adequacy ratio on a consolidated basis

5. Credit risk and market risk

·Credit risk

(1)   strategies of credit risk management and controlling

(2)   organizational structure and responsibility of credit risk management

(3)   names of ECAIs used to calculate risk weights, plus reason for changes

(4)   the amount of credit risk exposure

(5)   the opening and closing balance of non-performance loan

(6)   provisioning and reporting approach of general provision, special provision and specific provision

(7)   the opening and closing balance of general  provision, special provision and specific provision; the respective amount of provisions setting aside, recovering and writing-off in reporting period

(8)   the main principle to identify qualifying collaterals, the ratio of the collateral value to the principal of loans which is internally decided

(9)   the relevant management principle of guarantee loan.

·Market risk

(1)   strategies in market risk management

(2)   risks pertaining to interest rate-related instruments and equities in the trading book

(3)   the foreign exchange risk and commodities risk throughout the bank

(4)   influence on the bank’s profiting capability and financial profile with the movement of  foreign exchange rate and interest rate.