China’s Banking Regulator Dials Down Risk Requirements for Debt-Equity Swaps


The China Banking and Insurance Regulatory Commission (CBIRC) is toning down its risk requirements in relation to debt-for-equity swaps, in a bid to alleviate capital pressure for banks and spur greater participation.

Beijing has recently accelerated the launch of policies to support the debt-for-equity swaps that play a key role in China’s ongoing efforts to deleverage the corporate sector

Measures have included targeted cuts in required reserve ratios for commercial banks, as well as the recent launch of a reduction in the debt-equity swap risk weightings.

CBIRC has just issued the “Notice Concerning Marketization of Debt-for-Equity Risk Weightings” (关于市场化债转股股权风险权重的通知), stipulating that the risk weighting of the holdings of commercial banks in listed companies as a result of marketized debt-equity swaps is 250%, while the risk weighting for non-listed company equity is 400%.

Xu Wenbing (许文兵), chief banking analyst at the Bank of Communications Financial Research Center, said to Securities Daily that the Notice will further accelerate the implementation of debt-for-equity swaps in the second half of 2018 by dialling down capital requirements, and freeing commercial banks from concerns over the scope of converted debt as a share of capital.

According to Xu targeted cuts in the required reserve ratio have already freed up around 500 billion yuan in funds for debt-equity swaps, but can only go so far in the absence of complementary measures.

Li Qian (李茜), assistant general manager of the financial services department of Golden Credit Rating International, said that the reduction in risk weightings will significantly alleviate capital pressure for banks, further raising the motivation for banks to provide debt-for-equity swaps for listed concerns.

Li further points out that banks are the most important creditors for Chinese companies, making it easier for them to uncover enterprises with the potential to participate in debt-equity swaps, as well as help them with internal reforms, debt structuring and swap plans.

Chinese banks have already shown renewed enthusiasm for debt-for-equity swaps, with Ping An Bank releasing its “Public Notice on Replying to Feedback Opinions on Application Documents for A-share Convertible Corporate Debt” (关于公开发行A股可转换公司债券申请文件反馈意见回复的公告) on the evening 2 August.

According to the Public Notice Ping An Bank plans to contribute 5 billion yuan of its capital to the establishment of a debt-equity swap investment subsidiary, making it the first share-controlled bank to make such an announcement aside from China’s big five banks.