To further enhance the stability and soundness of China’s financial system, ensure that China’s global systemically important banks (G-SIBs) have sufficient loss-absorbing and recapitalization capacity, and forestall and defuse systemic financial risks, upon the approval of the State Council, the People’s Bank of China (PBC), China Banking and Insurance Regulatory Commission (CBIRC) and Ministry of Finance (MOF) jointly released the Administrative Measures on the Total Loss-Absorbing Capacity of Global Systemically Important Banks (hereinafter referred to as the Measures). Officials from relevant authorities answered press questions on the Measures.
1. What’s the background of the Measures?
A: In the wake of the global financial crisis in 2008, the precaution against the “too big to fail” issue became an important part of reviewing the lessons from the crisis and improving the financial regulatory system. To effectively address the issue, in November 2015, G20 leaders approved the Total Loss-Absorbing Capacity (TLAC) Standard for Global Systemically Important Banks (G-SIBs) presented by the Financial Stability Board (FSB), which set internationally unified standards on TLAC, and proposed that large financial institutions must have sufficient loss-absorbing capacity to ensure the continuity of critical business and services functions in resolution through bail-in, and avoid exposing public funds for external bailouts. In line with the FSB requirements, most countries or regions have customized the TLAC regulatory framework according to their actual situations.
Since 2011, the Bank of China, Industrial and Commercial Bank of China, Agricultural Bank of China and China Construction Bank have successively been included into the list of G-SIBs and increased their influence in domestic and global financial sectors. In order to reinforce the ability of China’s G-SIBs to resist risks and tighten market constraints, the PBC, jointly with CBIRC and MOF, thoroughly studied the outcomes of international financial regulatory reforms and drafted the Measures based on China’s actual situation, thus established a TLAC regulatory system, where it specified the definition, composition and requirements of TLAC as well as related supervisory review and information disclosure.
2. What’s the impact of implementing the Measures on China’s G-SIBs?
A: The TLAC requirements specified in the Measures are in line with market expectations. With supporting policies, China’s G-SIBs can satisfy the requirements without undergoing excessive stress on their normal business, which means their credit supply capacity will not be affected. Overall, the implementation of the Measures will exert a positive impact on the G-SIBs, as it will guide them to improve their risk resolution mechanisms, enhance their capacity for sound operation, and better balance their business development with risk resistance. As a result, it will help G-SIBs rein in irrational expansions and the accumulation of systemic risks, and facilitate their transformation towards diversified and comprehensive business. Meanwhile, the Measures are aligned with the latest practices of international financial regulatory reforms, and are conducive for Chinese banks to participate in global competition.
3. What are the basic principles underlying the formulation of the Measures?
A: First, the Measures is drafted based on the actual situation of domestic banks and fully aligned with the practices of international financial regulatory reforms. It is consistent with the FSB regulations in terms of the setting of TLAC requirements, requirements for meeting standards, and standards for eligible instruments. Meanwhile, by drawing on the experience of international banking institutions in determining the inclusion of deposit insurance funds and the capital deductions for TLAC instrument investment, the Measures better suits the development of China’s banking sector.
Second, the regulatory system of TLAC and that of capital are kept in consistency. The rules on capital supervision specified in the Measures are in line with the existing capital regulatory rules of China, and we have reserved some policy space given the fact that the CBIRC is further improving its rules on capital management of commercial banks.
Third, regulation on the TLAC is combined with the resolution mechanism for commercial banks. According to the Measures, the PBC will work with relevant authorities to organize regular meetings of the G-SIBs cross-border crisis management group, review the recovery and resolution plans (RRPs) of G-SIBs, and carry out the resolvability assessment process (RAP), thereby further improving the effectiveness of the resolution mechanism for commercial banks.
4. What are the external TLAC regulatory requirements that China’s G-SIBs should meet upon implementation of the Measures?
A: As stipulated in the Measures, the external TLAC ratios consist of a risk-weighted ratio and a leverage ratio, which refer to the ratios of eligible external TLAC instruments to risk-weighted assets (RWA) and to the balance of adjusted on- and off-balance sheet assets, respectively. The risk-weighted ratio and leverage ratio should reach 16 percent and 6 percent respectively by early-2025, and 18 percent and 6.75 percent respectively by early-2028. On the basis of external TLAC risk-weighted ratio requirements, G-SIBs are subject to capital buffer requirements, including those on capital conservation buffer, countercyclical capital buffer, and capital surcharge for systemically important banks.
5. What are the triggers for the non-capital external TLAC debt instruments to absorb losses and what is the loss-absorption hierarchy?
A: As stipulated in the Measures, non-capital external TLAC debt instruments must contain terms which permit the PBC and CBIRC to enforce the write-down or conversion to equity for G-SIBs in resolution. Non-capital external TLAC debt instruments absorb losses after Tier 2 capital instruments. In the event where all Tier 2 capital instruments have been written down or converted to equity, the PBC and CBIRC will initiate the write-down or equity conversion of non-capital external TLAC debt instruments as appropriate.
6. After the release of the Measures, how to enable China’s G-SIBs to meet the external TLAC requirements in a prudent and orderly manner?
A: China’s G-SIBs are expected to meet their corresponding external TLAC requirements by early-2025, so there is a transitional period of over three years. The PBC, CBIRC and MOF will guide and promote G-SIBs to gradually meet regulatory standards and safeguard economic and financial stability by establishing sound internal management mechanisms for TLAC, formulating and implementing phased plans to meet the goal step by step, and issuing TLAC instruments in a prudent and orderly way.
