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PBOC: 'Big Four' banks to adopt Basel capital adequacy standards by 2025 China has issued new rules that seek to improve the ability of the
country's global systemically important banks (G-SIBs) to absorb losses
and adhere to the global regulatory standards on capital adequacy and
liquidity by Jan 1, 2025, as part of the ongoing efforts to prevent
systemic financial risks. The People's Bank of China, the pral bank, and the China Banking
and Insurance Regulatory Commission, the banking regulator, said that
banks which have been designated as G-SIBs by the Financial Stability
Board, an arm of the G20, would have to comply with the Basel Committee
requirements on "total loss-absorbing capacity", or TLAC, to ensure that
they have enough equity and bail-in debt. Though the regulators have not announced an exact date for the new
rules to kick in, some financial institutions estimate that the Big Four
banks－Industrial and Commercial Bank of China, Bank of China,
Agricultural Bank of China and China Construction Bank－may need
additional capital of about 2 trillion yuan ($295 billion) to 3 trillion
yuan to meet the 2025 standards. The Big Four lenders may need to increase capital by nearly 392.4
billion yuan every year for the next six years, said Zhang Xu, an
analyst with Everbright Securities. The new policy will help China's G-SIBs, or banks that are deemed
"too big to fail", to make the necessary plans to satisfy the Basel
capital adequacy rules and help develop a multilevel capital market,
said a PBOC spokesman. The unbalanced financial structure of banks, which have been the
mainstay of China's financial system, had prompted regulators to promote
non-bank lending institutions and expand capital markets to curb debt
growth, analysts said. Moody's Investors Service, a global credit ratings agency, said in a
report that during the first eight months of this year, new lending rose
by 25 perp on a yearly basis to 15.1 trillion yuan. Formal bank
lending will continue to dominate new credit supply, the ratings agency
said, adding that banks would continue to maintain a strong flow of
long-term credit to corporates in line with the government's policy of
providing adequate support to businesses and investment. In November 2018, the PBOC said that it would implement the
international framework of TLAC for the four G-SIBs and said that it is
very likely that China might implement the TLAC framework earlier than
Jan 1, 2025. "The four G-SIBs are expected to actively use the new capital
instrument of perpetual bonds to strengthen their capital," said Yulia
Wan, a senior analyst with Moody's. Most of the large banks and
joint-stock banks may already have sufficient capital buffers to meet
the additional capital requirements, she said. In China, regulators have shortened the approval period for perpetual
bonds issues, reduced entry barriers for issue of preferred shares and
allowed eligible banks to use multiple capital replenishment
instruments, Wan said. The pral bank also said that it would establish a countercyclical
capital buffer regime, which became effective from Sept 30, to protect
the banking sector from periods of excess aggregate credit growth that
have often been associated with the buildup of systemic financial risks. During economic downturns, the capital buffer helps reduce risks that
could arise when credit supply is crimped by the regulatory capital
requirements. Regulators will assess and adjust specific requirements for the
capital buffer at regular intervals based on macroeconomic and financial
projections, leverage level and the robustness of the banking system,
the pral bank said. In December 2010, the Basel Committee on Banking Supervision
published the third version of a global regulatory framework for more
resilient banks and banking systems, which presented the details of
global regulatory standards on bank capital adequacy and liquidity,
including a countercyclical capital buffer.
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