China issues draft loss-absorbing capacity rules for systemically important banks

30 Sep, 2020 23:38
source: Singularity Financial

Singularity Financial Hong Kong September 30, 2020 –  China has issued long-anticipated draft rules governing its global systemically important banks’ (G-SIBs) ability to absorb losses in an effort to guard against systemic financial risks.

Global systemically important banks, also known as G-SIBs, have undergone many years of restructuring and re-engineering based on lessons learned from the global financial crisis. Coupled with tougher national and international regulations, the work had helped banks enter the pandemic period with cleaner balance sheets, stronger capital and better liquidity than the broader universe of banks.

The People’s Bank of China and the China Banking and Insurance Regulatory Commission on Wednesday published draft regulations requiring G-SIBs — banks that are “too big to fail” as their failure could trigger a wider financial crisis — to meet certain capital adequacy targets starting from 2025.

China’s top four lenders – Industrial and Commercial Bank of China, Agricultural Bank of China Ltd., Bank of China and China Construction Bank are designated as global systemically important banks.

The new rules require that such banks in China hold a total loss-absorbing capacity (TLAC) amount of at least 16% of risk-weighted assets starting Jan 1, 2025 – six years later than major global banks elsewhere – and the bar is further raised to 18% from Jan. 1, 2028.

They face an estimated funding gap of 5.77 trillion yuan ($847.45 billion) to 6.51 trillion yuan by 2024 to meet TLAC requirements set by the Switzerland-based Financial Stability Board (FSB), S&P Global Ratings said on Aug. 25.

The TLAC requirement was designed by the FSB to ensure global systemically important banks having a bottom line of risk buffers in case “too big to fail” financial institutions go bankrupt.

The People’s Bank of China (PBOC) and the China Banking and Insurance Regulatory Commission will regularly assess and adjust buffer requirements to prevent systemic risk, they said.