China's too-big-to-fail banks will need lower total loss absorption capital (TLAC) after the nation relaxed its rules to align with the Basel III framework, S&P Global Ratings said.
New rules that came into effect this year reduced the risk-weighted assets output floor for the five global systemically important banks (G-SIBs) in China to 72.5%, the same as Basel III norms, from 80%. As a result, China's G-SIBs could lower their risk-weighted assets and, therefore, lower their TLAC needs.
This would help banks "mitigate strains on their capital buffers," Ratings said in a March 7 report.
"We believe China's new capital management rules are a closer alignment to the Basel III framework and better reflect risks," Xi Cheng, director and lead, financial services ratings, said during a Mar. 13 webinar. "Our view is that Chinese G-SIBs are walking on a tightrope to balance their loan growth with a need to comply with the global TLAC standards. This is especially in environments with declining profitability."
China has set a gross domestic product growth target of 5.0% for 2024 amid weakness in the nation's real estate sector. The world's second-biggest economy expanded 5.2% in 2023, surpassing a similar growth target for the year. China asked banks in 2023 to step up lending and is seeking to bolster key sectors of the economy, though the recent key meeting of the National People's Congress reiterated the government's stance on the need to avoid speculation in real estate, which accounts for nearly a quarter of GDP.
Big banks
China is home to five of the world's 30 G-SIBs, commonly known as too-big-to-fail banks. These are Industrial and Commercial Bank of China Ltd., China Construction Bank Corp., Agricultural Bank of China Ltd. Bank of China Ltd. and Bank of Communications Co. Ltd., according to the G-SIB list as of November 2023 compiled by the Basel-based Financial Stability Board.
ICBC, Agricultural Bank and BOC earlier this year announced plans to issue 260 billion yuan of TLAC bonds, while China Construction Bank is expected to announce plans later in the year.
Ratings estimated in June last year that China's G-SIBs would have a shortfall in their TLAC of up to 2.5 trillion yuan, according to the report. "But we now believe this figure can be much lower partially because of a realignment of capital rules with the Basel III framework," Cheng said during the webinar.
As of March 12, US$1 was equivalent to 7.18 Chinese yuan.
