zhou xiaochuan : capital accord ii and regional disparities in financial risks speech by mr zhou xiaochuan, governor of the people ’ s bank of china, at the seminar on risk management and internal control of the commercial banks, beijing, 8 january 2004. * * * it is a great pleasure to attend and speak at this important seminar. the subject of the seminar is of particular relevance at a time when the state council just took the decision to recapalize the two large state - owned commercial banks. the significance of the capital infusion lies not only with the strengthening of the capital base of the two banks, but also with the important signals it sends to the outside world, indicating banking reform will be accelerated with more decisive actions to improve internal management and corporate governance of the commercial banks. i believe this seminar could make an important contribution to promoting internal reform, in particular the internal control and risk management of the commercial banks. i will focus my speech on one important aspect of risk management, which deals with basle capital accord ii and the regional disparities in financial risks across china. basle capital accord is an important document in terms of banking supervision and the chinese banking regulatory authority has committed to pushing forward its application in the banking sector. while emphasizing the importance of capital adequacy in the business operations of the commercial banks, the capital accord has also set a clear definition for bank capital, leading to the development of such concepts as tier - one capital and tier - two capital, and answered the question on how the asset risks could be properly calculated. in 1988, the basle banking supervision committee assigned respective weightings to different categories of risks in its first edition of the capital accord, which was quite necessary at that time. because many banks back at that time could not rely adequately on themselves to identify and measure the risk profiles of different categories of loans. however, it remains disputable as to whether such risk weightings should be assigned based on the status of a country in an organization, i. e., as a member of the oecd or not. later on, some progress was made and a new capital accord ( capital accord ii ) was formed in which more emphasis was put on risk management. despite different views on its application in reality, capital accord ii marks an important step forward in strengthening prudent banking supervision. the chinese banks and the regulatory authority also welcome such a development and vow to actively push for its implementation across the banking sector

the local investment environment. in one word, this perception has marked a sharp difference from the past. many people used to hold the view that banking credit was actually confined to local use and the credit risks of the national commercial banks could be transferred to the government. now i am pleased to see some positive changes. from the perspective of the commercial banks, they are able to move credit fund from the high - risk areas to areas with low risks. they can also float the lending rate to reflect the financial risk difference among various regions. form the point of the local governments, they now care about not only the local financial environment, but also the quality of the local customers of the financial institutions. that is to say, they stress much about the creation of a sound local credit system under which businesses in the region must fulfill their fiduciary and debt obligation. apart from that, public listing companies in the region are also encouraged to timely disclose reliable and quality information so as to lay a solid reputation for other companies in the region seeking public offering. in my view, these are important and positive progress which owes much to the efforts of both the local governments and the commercial banks. however, we must recognize that these efforts only mark the beginning of a long process, and the remaining regional risk difference means the internal risk rating will continue to be applied in the foreseeable future. as the final note, i would like to point out that, despite the above progress, much remains to be done to eliminate the regional financial risk difference in china. regional segregation and disparity once has been a major obstacle to china ’ s economic reform. but i believe the market forces will finally prevail. with the implementation of the basle capital accord ii and the irb, better microeconomic fundamentals will gradually emerge as the local governments strive to improve the regional financial ecological environment and the interactions between the financial institutions and the local governments further strengthen in a positive way. i wish the seminar a great success, thank you all.