PBOC Issues “Chinese Edition” of Total Loss-absorbing Capacity Rules for China’s Global Systemically Important Banks

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China’s top financial authorities have just issued draft regulations governing the total loss-absorbing capacity (TLAC) of global systemically important banks (G-SIB’s) in the country.

The People’s Bank of China (PBOC) and the China Banking and Insurance Regulatory Commission (CBIRC) jointly issued the draft version of the “Global Systemically Important Banks Total Loss-absorbing Capacity Administrative Measures” (全球系统重要性银行总损失吸收能力管理办法(征求意见稿) for the solicitation of opinions from the public on 30 September.

PBOC said that the Measures had the goal of “strengthening the stability and health of the Chinese financial system and preventing systemic financial risk” by ensuring that China’s G-SIB’s possesses sufficient TLAC as they enter the disposal period.

The concept of G-SIB’s first came to the fore as a regulatory concept following the 2008 Global Financial Crisis, amidst efforts to improve macro-prudential regulation internationally.

Chinese financial institutions categorised by the Financial Stability Board (FSB) in Basel as G-SIB’s include all of the original big four state-owned banks – Agricultural Bank of China, Bank of China, China Construction Bank and the Industrial and Commercial Bank of China.

TLAC is the international standard approved by the FSB in November 2019 to ensure that G-SIB’s’s possess sufficient equity and bail-in debt to minimise the risk of government bailouts. Since the start of 2019 G-SIB’s have been required to hold a TLAC equal to 16% in terms of risk-weighted assets (RWA), or 6% of the leverage exposure measure.

By 1 January 2022 this requirement will be increased to 18% of RWA’s, while national regulators will also have the discretion to apply more strict interpretations of the standard.

Key contents of the draft version of China’s new Administrative Measures on TLAC include:

1.Confirmation of the basic principles for TLAC, and that Chinese G-SIB’s may use qualified capital and debt tools during entry into the disposal period to absorb losses via methods such as write-downs or conversion into common stock.

2. Confirmation of the calculation methods and satisfaction requirements for external TLAC risk weighed ratios and leverage ratios.

3. Confirmation of the basic composition of external TLAC, and qualification standards for capital tool and non-capital debt tools for inclusion in external TLAC.

4. Confirmation of external TLAC deduction items, and regulations for capital deductions of G-SIB’s and non-GIB’s holding the TLAC non-capital debt instruments issued by other G-SIB’s.

5. Confirmation that PBOC conducts inspection and regulation of the TLAC conditions of Chinese G-SIB’s.

6. The requirement that Chinese G-SIB’s use public channels to provide information the general public on TLAC, as well as ensure the veracity, a accuracy and completeness of such information.

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