China’s Big Four Banks Need To Expand Loss Aborption Buffer by $450 Billion


China’s big four banks may need 2.85 trillion yuan (approx USD$450 billion) in total-loss absorbing capacity (TLAC) instruments in order to satisfy the requirements of the Financial Stability Board for global banks deemed too big to fail.

The G20 launched a new standard for the TLAC of the world’s 30 global systemically important banks (G-SIBs) in November 2015, as part of efforts to shore up the resilience of financial institutions that are “too big to fail,” as well as avert the need for a taxpayer bailout in the case of contingency.

FSB currently requires that G-SIBS in advanced economies hold TLAC instruments equal to 16% of risk-weighted assets by 2019 and 18% by 2022, while for emerging markets the schedule is 16% by 2025 and 18% by 2028. 

With all of China’s big four banks (Agricultural Bank of China, Bank of China, ICBC and China Construction Bank) deemed G-SIBS by FSB, Beijing issued preliminary guidelines for the sale of securities to absorb major losses in the case of contingency in March.

Moody’s Investors Services estimates that the big four will need an additional 2.85 trillion yuan  to meet the 2025 deadline – an amount more than double the dollar bond issuance made by China’s borrowers in 2017.

Analysts expect this copious volume to have a major impact on China’s bond market.

“These offerings form the big four banks that have good credit support may take big chunk of the allocations from investors onshore,” said Lv Pin, senior associate at Citic Securities, to Bloomberg.

“TLAC debt instruments issuance will result in supply pressure in the coming years, especially for lower rate corporate bonds.”

“Potential TLAC issuance volume could be huge,” said Tim Fang, co-head of debt capital markets of AMTD. “The banks would need to access both onshore and offshore markets on a consistent basis to meet the additional TLAC requirements.”