At a glance
- China’s global systemically important banks are likely to benefit from a softening of the rules around total loss-absorbing capacity requirements
- The changes bring China in line with global norms on capital rules, and will not have a detrimental impact on capital buffers
- It is possible the regulators will also permit the deposit insurance fund to be included
China’s largest banks are to see a reduction in the capital measures needed to comply with Basel III regulations, and bring them in line with the international community.
As China’s largest state-owned banks, Bank of China, China Construction Bank, Industrial and Commercial Bank of China and Agricultural Bank of China are classed as globally significant. The banks must comply with the People’s Bank of China’s requirement to have a minimum total loss-absorbing capacity of 16 per cent on risk-weighted assets by 2025, rising to 18 per cent by 2028.
A report from S&P Global Ratings has outlined how a closer alignment to Basel III capital rules in calculating risk-weighted assets could reduce the capital levels needed for compliance.
ICBC, ABC and BoC earlier this year announced plans to issue a total of Rmb26bn ($3.6bn) of TLAC bonds, with CCB expected to make its own announcement. There was some concern that this sum would not be enough to cover the banks’ requirements. Fitch estimated in 2023 that the four global systemically important banks would need to issue Rmb1.3tn in capital instruments to be compliant by 2025.
However, it is possible the sum will now be sufficient as the calculation for risk-weighted assets has been adjusted downwards from 80 per cent to 72.5 per cent. The changes bring China in line with the global norms around capital rules, with banks operating with best practices in risk management, permitting lower capital requirements. As a result, the GSIBs are allowed to calculate their RWA by using internal parameters to determine credit risk. This often results in a lower value. When China initially drew up its rules in 2012, the regulators were more conservative.
Xi Cheng, director at S&P Global Ratings, said: “The new rules are more risk-sensitive, meaning that capital required is lower for good quality assets and higher for bad. Chinese GSIBs generally have reasonably conservative underwriting standards and more diversified loan books compared to their domestic peers.”
The outcome is likely beneficial. Cheng said: “We may see some positive movements in their regulatory capital ratios due to the revisions in the parameters depending on their loan book structure. But the leverage ratio (capital over assets) may go down a bit depending on banks’ growth appetite.”
The banks have been balancing the demands of the regulator for TLAC compliance, while also seeing pressure from the Chinese government to increase lending to reach the 5 per cent gross domestic product target for 2024.
Banks are also likely to be permitted to include the deposit insurance fund within the capital ratio, although this has not been confirmed by regulators. However, reserve levels are low, with S&P stating the level was equivalent to around 25 to 35 basis points of the RWA of China’s four largest state-owned GSIBs.
Although the overall capital buffer resulting from the changes is likely to be lower than previously expected, Cheng said it will not have negative repercussions: “We expect the new rules to better reflect risks and prompt banks to enhance their risk management. We don’t think the regulator’s purpose is to reduce the sector’s capital buffer by launching the new capital rules.”
The addition of Bank of Communications to the list of GSIBs by Basel’s Financial Stability Board in November 2023 will likely mean an increase to TLAC bond issuance in the coming years, according to experts. As Bocom is new to the list, it is granted a transition period of three years to begin meeting requirements.
