The Chinese central bank will allow banking sector financial institutions to write-off their capital supplementation bonds or convert them into equity, as part of efforts to shore up their ability to absorb capital losses.
Public announcement no. 3 released by the People’s Bank of China on 27 February said that the move is also intended to encourage banks to issue new forms of capital supplementation bonds that possess innovative loss absorption mechanisms or trigger conditions.
The “capital supplementation bonds” as outlined by the PBOC announcement include both capital bonds without fixed terms and tier-2 capital bonds.
According to Securities Times, Chinese banks have traditionally used preferential shares as their main capital supplementation instrument. While equity conversion is allowed for bonds issued by banks that set specific trigger conditions, this has not been the case for tier-2 capital bonds.
The new regulations mean that banks will be permitted to set conditions for the conversion into equity of a greater volume of their capital supplementation instruments.
Public announcement no. 3 also rescinds PBOC’s 2006 public announcement no. 11, which contain restriction provisions on the advance redemption, delayed payment of interest, delayed payment of principal and interest at the time of maturation as well as settlement order for hybrid capital bonds.
The annulment of the announcement means that trigger conditions for the advance redemption or delayed interest payments of capital bonds issued by Chinese banks may be set by them independently.
In addition to this, the latest PBOC public announcement said that banking sector financial institutions should engage in the rational formulation of capital supplementation and capital bond issuance plans, giving full consideration to factors including asset growth, structural adjustments, internal capital retention and the external environment.