China Issues Additional Capital Requirements for Systemically Important Banks

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China’s top financial authorities have just issued new rules that outline additional requirements for the country’s systemically important banking sector financial institutions.

The People’s Bank of China (PBOC) and the China Banking and Insurance Regulatory Commission (CBIRC) jointly issued the draft version of the “Additional Regulatory Provisions for Systemically Important Banks (Trial)” (系统重要性银行附加监管规定(试行)(征求意见稿)) for the solicitation of opinions for the public on 2 April.

The release of the Provisions follows the issuance of the “Systemically Important Bank Assessment Measures” (系统重要性银行评估办法) by PBOC and CBIRC in December 2020.

PBOC and CBIRC said that the Provisions are for the purpose of “improving the regulatory framework of China’s systemically important financial institutions and strengthening macro-prudential regulation, by clarifying relevant requirements, encouraging banks to reduce systemic risk, raising self-rescue capability and preventing ‘too big to fall’ risk.”

The Provisions outline additional capital, leverage ratio, liquidity and large-sum risk exposure indices with reference to international practice.

These include an additional capital requirement of 0.25% for group 1 systemically important banks, 0.5% for group 2, 0.75% for group 3, 1% for group 4 and 1.5% for group five.

The additional leverage requirement for systemically important banks is 50% of their additional capital requirement.

Given that the “Commercial Bank Leverage Ratio Administrative Measures” (商业银行杠杆率管理办法) stipulate that the consolidated and unconsolidated leverage ratio of banks cannot be less than 4%, this means that for group 1 banks the ratio will be 4.125%, for group 2 banks it will be 4.25%, for group 3 banks 4.375%, for group 4 banks 4.55% and for group 5 banks 4.75%.

When systemically important banks in China are included in a group or ascend to a different group, they are required to satisfy new requirements on 1 January following the conclusion of a natural business year.

The additional capital requirements will also be subject to further adjustments by PBOC and CBIRC in future based upon circumstances.

The additional capital requirements for systemically important banks outlined in the Provisions are not a replacement for additional capital requirements in China’s macro-prudential assessments.

The Provisions also highlight the role of recovery and resolution plans (RRP) as key risk mitigation tools for systemically important banks in China.

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