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"Too big to fail" Chinese banks face US$400 billion capital call

Wednesday, November 11, 2015 - 11:57
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A Chinese national flag flutters outside the headquarters of the People's Bank of China, the Chinese central bank, in Beijing, in this Apr 3, 2014 file photo.

[HONG KONG] China's four biggest banks may have to raise up to US$400 billion to meet new global capital rules, an onerous task that could pressure them to slow down lending at a time when Beijing wants them to help prop up economic growth.

The Financial Stability Board (FSB) this week finalised rules for ensuring banks do not become "too big to fail", a pledge made by the G20 after governments spent more than US$1.5 trillion rescuing financial firms in the 2008 financial crisis.

The rules will apply to China's major state lenders, a coup for Western banks which had complained that a proposed exemption for emerging market institutions would give the Chinese banks an unfair competitive advantage as they expanded overseas.

The reforms require the world's 30 systemically important banks, known as GSIBs, to hold a buffer of capital that can be written down to protect taxpayers if the bank goes bust.

This layer of Total Loss Absorbing Capacity, or TLAC, comprises a large chunk of debt and comes on top of banks' core Basel capital requirements.

China has four GSIBs: Bank of China, Agricultural Bank of China, Industrial and Commercial Bank of China , and China Construction Bank which was added to the GSIB list only last week.

Industry insiders and analysts said the Big Four would need to raise a total of between US$350 billion and US$400 billion to comply with the rules, but they were unlikely to do this until after 2020.

In a note published ahead of Monday's announcement, James Antos, an analyst at Mizuho Securities in Hong Kong, said China's banks would suffer the "greatest burden" in meeting the requirements because they currently held minimal senior debt. "Since these banks are majority owned by central government agencies, we are not convinced that adding debt is entirely appropriate. We think TLAC will boost costs for China's Big Four banks without adding much in the way of depositor protection." China's regulators lobbied hard for an open-ended exemption from TLAC, arguing its capital markets were not deep enough to absorb so much issuance, leading the FSB to propose an exemption for emerging markets banks in February.

BIG WINDOW

On Monday, the FSB scrapped the emerging markets waiver in favour of a much longer phase-in period. "At face value, this final version looks a lot fairer," said Royce Miller, a partner at law firm Freshfields in Hong Kong. "There were powerful voices at the table and valid arguments on both sides and this is a compromise which means the Chinese banks have to comply by fixed deadlines, but they have a very long window." GSIBs from developed markets will be required to meet a minimum TLAC requirement of at least 16 percent of the group's risk-weighted assets (RWAs) from January 2019, and at least 18 percent from January 2022, while this time frame is 2025 and 2028 respectively for emerging markets banks.

Shares in China's Big Four banks fell an average of 1.7 per cent in Hong Kong trading on Tuesday, slightly underperforming the benchmark Hang Seng index.

ICBC declined to comment. The other three banks did not respond to requests for comment.

Although Chinese banks' raised record levels of capital last year and boast healthy average core equity ratios of around 12-15 per cent, this buffer is under growing pressure as lending growth outstrips these firms' ability to retain earnings.

The capital requirements are, however, unlikely to cause a shock to the system, said Matthew Smith, China banks analyst at Macquarie, citing the banks' generous deadline. "By then, the capital market in China should be more developed to accommodate these sizable fund-raising activities." But the new requirements are likely to spur a change in Chinese banks' behavior as they look to rely more on wholesale funding, potentially pare down risk-weighted assets, and become more familiar with TLAC debt instruments such as subordinated bonds, said bankers. "The Chinese banks have won a stay of execution," said one Hong Kong banker who has helped Chinese banks raise capital."But they are going to have to become extremely active in the capital markets."

REUTERS

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