Yu feels potential dangers for the banking industry are accumulating now. Because of the sudden growth of extended loans, the capital adequacy ratios of most banks have declined below 12 percent and even near 10 percent in some cases.

Meanwhile, 10 percent represents the lowest capital adequacy ratio in commercial banks as required by the CBRC. Rather, the sudden growth of granted loans may lead to a concentrated breakout of under-performing loans in the first half of next year.

According to Yu, in the risk management and control by commercial banks, the capital adequacy ratio is a critical indicator that ensures commercial banks maintain adequate capitalization and avert bankruptcy when facing with a certain non-performing assets ratio.

But it is precisely because of a sudden expansion of credit that the capital adequacy ratios of most Chinese commercial banks are declining. And without supplements of sub-prime, the capital adequacy ratios of some banks would have been dangerously diluted. However, as secondary capital, sub-prime loans are also bank debts that must be repaid. We can also say that the solvency of Chinese banking industry has now reduced to its lowest level in the 1990s, he said.

According to Yu, since the capital adequacy ratio is related to the credit-granting ability of commercial banks, supervision on the capital adequacy ratio implies requirement of lowering the speed of credit growth relative to a stable level.

Compared with the interest-driven impetus of granting loans by commercial banks, on the other hand, the regulatory authority is more concerned with financial stability than security. Hence, to comply with the requirements of the capital adequacy ratio via the new capital accord, banks must control their scales of credit.

Sub-prime less affected

Besides the capital adequacy ratio, risk of asset securitization is another major content of the new capital accord. In the first half this year, commercial banks issued sub-prime loans on the inter-bank market 12 times at an amount of 104.2 billion yuan ($15.26 billion), surpassing the total amount of 97.4 billion yuan ($14.26 billion) last year.

Since the second half, meanwhile, the Bank of Communications, Bank of China and the Industrial and the Commercial Bank of China issued sub-prime loans of 25 billion yuan ($3.66 billion), 40 billion yuan ($5.86 billion) and 40 billion yuan, respectively.

And this year, Chinese commercial banks obviously entered a new round of capital expansion. Indeed, the CBRC recently expressed its worry of the fact that banks withhold a huge amount of sub-prime, so that risks cannot be effectively diversified outside of the banking system.

But "according to our communication with several listed banks," said Mao Junhua, an analyst with China International Capital Corp. Ltd., "since the CBRC and the People's Bank of China required in 2004 that the balance of sub-prime issued by other banks that commercial banks hold shall not surpass 20 percent of their core capital, no banks now hold sub-prime that surpass 20 percent of their core capital."

Related provisions, she added, stipulate that if a bank holds sub-prime loans that surpass 20 percent of its core capital, the exceeded amount will be deducted from its capital.

Mao thinks there is still space for commercial banks to issue sub-prime loans. By the end of June 2009, however, the total assets of Chinese banking industry had reached 73.7 trillion yuan ($10.79 trillion), and the total debts had been 69.8 trillion yuan ($10.22 trillion), with the net assets standing at 4 trillion yuan ($585.65 billion).

That is to say, the amount of sub-prime loans Chinese banks are allowed to hold is 700 billion yuan to 800 billion yuan ($102.49 billion-$117.13 billion), or 20 percent of their net assets. By contrast, the banking system now holds just sub-prime borrowings of 250 billion yuan ($36.6 billion).

This means that the whole banking industry is capable of purchasing sub-prime of anywhere between 400 billion yuan ($58.57 billion) and 500 billion yuan ($73.21 billion), which is within the permitted limit set by the new capital accord.

The Basel New Capital Accord

The Basel New Capital Accord, or the International Convergence of Capital Measurement and Capital Standards: a Revised Framework (Basel II), was first released in 2004.

The new capital accord has been revised from Basel I, which dictated the competition rules of the international banking industry over the past decade. The latest accord expands the scope of risk control from credit risk alone to credit risk, market risk, operating risk and interest rate risk. It also proposed "three pillars" for the accord: minimum capital requirements, supervisory review process and market discipline.