Outlook of the Chinese Financial Risk Management: Qihai Guan
Guan’s work clarifies Basel III’s role – a core standard of global banks, and explores the numerous implications of financial stability.
（Photo of Guan）
Since inception, the Basel Capital Accord has been plagued by disputes regarding its shortcomings and inadequacies, putting a damper on promoting the accord of reforming global finance. The U.S. and EU regulatory authorities are slowing down the implementation of Basel III due to several factors, with the intention of giving the banking industry in the U.S. and Europe a longer “buffer period”.
The China Banking Regulatory Commission (CBRC) promulgated the “Capital Management Measures for Commercial Banks” (commonly known as the “Chinese version of Basel II”) in June 2012, requiring implementation of Basel II, effective from January 1, 2013.
The stricter risk regulatory framework is conducive to the long-term development of China’s banking industry and the sound development of the economy. According to schedule, the final Basel III program will be officially implemented globally on January 1, 2023. Guan is now exploring several further research assisting its implementation.
Qihai Guan is currently the deputy chief risk management specialist at Ping An Bank, one of twelve joint-stock commercial banks in China. He was a former member of the New Capital Agreement Research and Planning of the CBRC and a postdoctoral researcher in finance at Peking University. Over the years, he has taken the lead in comprehensive risk management system planning as well as the Basel II and III implementations in China. His work in recent years has explored the implementation of Basel III and its insufficiencies.
As a member of the New Capital Accord Research and Planning Project, Guan was involved in the drafting of the regulatory guidelines for the implementation of the New Capital Accord in China’s banking industry. With the establishment of the “Guidelines for the Supervision of Internal Credit Risk Rating Systems of Commercial Banks” and “Guidelines for the Validation of Advanced Methods for Capital Measurement of Commercial Banks”, the guideline “Measures for Capital Management of Commercial Banks (for Trial Implementation)” officially released and were implemented in the Chinese banking industry in 2012.
In addition, appointed as the Deputy Chief Risk Management Specialist at Ping An Bank for Basel implementation, Guan saw to the complete process submitted for compliance. By the end of 2022, Ping An Bank will shift to the new BASEL III Accord to enhance risk management.
Guan said that Basel’s advancement is significant for China and the implementation of the Basel Accord is a step closer to the globalization of the banking sector and the opening up of the financial industry to the outside world, setting the stage for the advancement of China’s financial globalization.
“In the last two years, we have been exploring the internationalization of the financial sector.” says Guan, “to reform and open up of the financial sector, including the accession of the RMB to the SDR, the market reform of the RMB exchange rate, the opening of the capital account, allowing foreign financial institutions to set up operations in China, as well as the inclusion of A-shares in the MSCI index system this year, etc., all to safely attach to the international financial markets.”
Whether a client’s banking risk complies with the standards of the accord will also be an determining factor for the risk-resiliency of the international banking system. It is therefore imperative to implement the Basel III regulation.
In addition, the macroprudential regulatory framework noted in Basel III offers preparation guidance for the MPA examination. The capital adequacy ratio and leverage ratio, as well as the LCR NFSR in the current MPA examination, are all related to the Basel Accord. On top of that, Basel III will steer the banking sector into expediting the transformation of its development, to contribute to the stability of China’s financial system and the sound development of the banking sector.
The Basel Accord ushered in the fundamental model for quantitative risk management, where Guan was the first to build a risk model classification system as well as its mechanism, process and methodology for model risk management in China. Model risk management serves an increasingly vital role in risk related decision-making in commercial banks.
While improving decision-making efficiency and risk control, the occurrence of model risk it would also result in incalculable losses to banks, owing to the risks caused by defects in model design and development or errors in the application. Thus, model risk control has gradually become a growing priority for regulatory and commercial banks around the world.
In 2021, Guan built the first independent model risk management system by referring to the model risk supervision guidelines of the Federal Reserve, Canadian federal financial institutions, and the European Central Bank. Combining with the current situation of Ping An Bank’s model management, the act filled the gap of model risk management in China.
“Many questions will continue to rise regarding the implementation of the Basel accord in China. Although the banking sector is largely compliant with the new regulatory requirements, small and medium-sized commercial banks are under tremendous capital market pressure. The countless regulatory tools and problems in banks may undermine the process and efficiency of Basel III implementation”, says Guan.
At present, there is no alternative system in the world comparable to the Basel system, as all countries share the goal of establishing a modern financial risk management system that is in line with the national context.