Beijing Set to Expand List of “Too Big to Fail” Financial Institutions as Deleveraging Ends

The Chinese central government plans to dramatically lengthen the list of systemically important financial institutions (SIFI) as part of efforts to forestall crisis amidst ongoing debt gains.

Sources speaking to the South China Morning Post said that the People’s Bank of China (PBOC) will lead the drafting by regulators of a shortlist of 50 potential SIFI’s, including banks, insurers and brokerages.

SIFI’s will be required to observe heightened capital requirements, and may also be subject to stricter rules on information disclosure, leverage and risk exposure.

According to the sources Beijing already considers 20 banks to be SIFI’s, or financial institutions which are “too big to fail” given the potential implications of them capsizing upon the broader financial system.

China hasn’t seen the failure of a major bank since the 20th century, with the closure of Hainan Development Bank in 1998 by PBOC for failure to make its debt payments.

China’s big four state-owned banks already feature on a list of international SIFI’s compiled by the Financial Stability Board – an international association of central banks and regulatory agencies, while Ping An Insurance is listed as one of the world’s nine systematically important insurers.

The move to expand the SIFI list arrives just as Beijing’s deleveraging campaign “goes into reverse” and the Chinese central government pushes for greater credit extension.

While China has pursued a heavy-handed deleveraging campaign over the past two years, a recent study from the Bank of International Settlements points out that these efforts have come to an abrupt end as escalating trade tensions with the US compel Beijing to adopt robust measures to support the economy.

A report from JPMorgan nonetheless claims that China’s debt-GDP ratio fell for the first time in nearly six years in the second quarter of 2018, edging down to 268% from 269% in the first quarter.

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