W21st NYC's Profile

And I suddenly realized what it is: it’s like the runup to the Iraq war,

Even amid early signs that the economy is recovering, the report suggested that the country’s 8,100 lenders remain in fragile condition.

That move is expected to add about $45 billion to the fund, which stood at $34.6 billion a year ago, but should avoid straining bank earnings thanks to favorable accounting treatment.

As a result of the sweeping regulatory overhaul, trading volumes have plunged and foreign banks are scrambling to adapt to doing business in the new environment. “If you compare the business we are doing today with the business we were doing two years ago, it’s completely different,” says Mr Castel. “You have to forget about [the old] market. It’s gone.”

The biggest shock to the established order came this summer when the China Banking Regulatory Commission banned most of the trades that can be originated offshore.

For the Chinese banks, however, acting as middlemen proved less advantageous. When the crisis struck in 2008, they were forced to provide their foreign trading partners with vast amounts of collateral, but were unable to recover nearly as much money from the local companies on the other side of each trade.

Regulators are said to be furious that local banks got into such a vulnerable position and enabled offshore groups to use “suitcase salesmen” to do business on mainland soil.

As well as banning the practice of intermediary trades, the CBRC now requires that banks ensure clients only buy derivatives that are appropriate for their hedging needs. The rules make it “virtually impossible to do some of the hairier trades and will really chill the market for anything but vanilla trades in future”, says Fred Chang, an industry veteran who now works for the law firm Lovells in Beijing.

What is clear is that foreign banks, while bruised, are unwilling to let either regulatory clampdown or local competition drive them out of the market. As one western banker in China says: “You have to be in this market. You can’t afford to stay out of it.”