The CBRC requirements reflect the government's growing concern—a fear rooted in skyrocketing loans that could lead to massive non-performing loans and diminish a bank's ability to manage risks—over the accumulating risks in the banking system after a year of blowout loans.

In the past, recognition was given to the general belief in market self-adjustment and self-modification, with the argument being that effective supervision must be built on effective internal management and effective control of commercial banks. Sufficient market constraint also needs to be practiced, Wang said.

"The current financial crisis has taught us that an absolute reliance on and trust in market self-adjustment and the commercial banks' internal control is not reliable at all," Wang said.

In order to guarantee sufficient capital adequacy ratios for the three major listed state-owned banks, Central Huijin Investment Ltd., the largest shareholder of the three banks, issued a special order, stating the banks do not have to turn in profits to the shareholders but can instead use those profits to reach the capital adequacy target. Under Central Huijin's special order, the three state-owned banks no longer need to re-finance themselves through the capital market.

In late September this year, Central Huijin held a 67.5-percent, 57.0-percent and 35.4-percent stake, respectively, in the Bank of China, China Construction Bank, and the Industrial and Commercial Bank of China.

The capital adequacy ratio of the commercial banks is not the CBRC's only worry. Capital liquidity is also on the commission's list of immediate concerns. On November 29, the CBRC publicized its Guidelines on the Liquidity Risk Management of Commercial Banks, ordering commercial banks to properly handle liquidity risks to maintain adequate liquidity.

The CBRC has also placed maintaining sufficient liquidity in commercial banks on top of its daily supervisory agenda by capping the loan to deposit ratio at 75 percent, carrying out stress tests among the banks and modifying the credit structure.

Currently, the overall commercial bank liquidity level is relatively high. According to CBRC figures, at the end of September 2009, the average liquidity in commercial banks stood at 42 percent, much higher than the minimum 25-percent requirement.

Suggestions

"To stimulate the sustainable development of the banking industry, a comprehensive financial supervisory system must be built to cover all financial institutions," said Jiang Dingzhi, Vice Minister of CBRC, at the International Financial Forum 2009 held in Beijing on November 15.

Focusing on post-crisis reform and revitalization, the forum's main topics addressed banking security and supervision. More than 500 international financial policymakers and leaders attended the event.

Thanks to concerted global efforts to stimulate economic growth, improvements of the world economy indicate that the worst may be over, Jiang said.

"The next question we need to consider is how the Chinese banks can solidify their systematic foundations in the post-crisis era through self-modification," Jiang said.

The task at hand for the Chinese banking sector needs to be the establishment of a flexible and dynamic capital complementary mechanism, Jiang said.

"As we all know, the lack of a concrete capital source is a main reason for bankruptcies among investment and commercial banks," Jiang said. "The banks must continue to improve their capital management systems and strengthen their ability to fend off inadequate capital risks."

Jiang suggested commercial banks be permitted to decide their own capital adequacy ratio in line with their own conditions at different stages of development.

"Commercial banks must keep a relatively high capital adequacy ratio when the economy is booming to cope with unexpected risks and losses that might occur should the economy begin to falter," Jiang said.

But during an economic recession, Jiang said, the capital adequacy ratio should be reduced accordingly to increase the credit supply, spurring the economy to bottom out sooner.

Reserving sufficient capital in commercial banks and improving the quality of the capital structure should take precedence in the banking sector in order to be better prepared for future financial crises, Jiang said.

"Retaining more profit, reducing shareholder dividends and increasing financing from the capital market to supplement the core capital of the banks are the most effective firewalls to prevent unexpected losses," said Jiang.