New rules to better weave safety net around "too big to fail" banks

BEIJING -- China's financial watchdogs are mulling new rules to regulate the country's biggest banks to forestall the "too big to fail" issue that threatens financial stability.

The country is about to announce a regulation on the evaluation of systemically important banks, and would impose additional regulatory requirements involving leverage levels and corporate governance on these banks, Pan Gongsheng, deputy head of the People's Bank of China (PBOC), the country's central bank, said at the Annual Conference of Financial Street Forum 2020, which concluded Friday.

As COVID-19 dealt a huge blow to the world economy, policymakers worldwide are worried that the pandemic would hurt the solvency of large financial institutions, leading to the government bailout of the "too big to fail" institutions seen during the 2008 international financial crisis.

To forestall such risks, China has been constantly improving its regulatory framework to help big banks maintain a healthy balance sheet and build up their capacity to withstand external shocks.

Policymakers are soliciting public opinions on regulation for the total loss-absorbing capacity (TLAC) for the global systemically important banks (G-SIBs) in China, a move that will further fine-tune the risk disposal mechanism of the country's commercial banks and reinforce the financial system in the long term, according to a notice released by the PBOC and the China Banking and Insurance Regulatory Commission (CBIRC).

Systemically important financial institutions, usually with large business scales and featuring high complexity and interconnectedness, could greatly impact regional or even global financial stability when exposed to risk events.

To tackle the global issue of "too big to fail", the Group of 20 in 2015 finalized the common international standard for G-SIBs on TLAC, or the minimum amount of debt and equity that allow the banks to pass losses to investors and reduce the risks of a government bailout.

In line with the global standard, G-SIBs in China are required to hold a TLAC amount of 16 percent in terms of risk-weighted assets, or 6 percent of the leverage exposure measure starting from 2025. The two requirements will respectively increase to 18 percent and 6.75 percent in 2028.

The Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, and China Construction Bank -- the four G-SIBs of the country -- are striving to meet the demand.

The PBOC has the right to propose separate requirements for the four banks, ensuring their TLAC is sufficient, said the regulation.

The regulation may have a limited impact on the profits of the four banks as a result of the rising capital requirements, but will shore up the weak links and increase the long-term stability of the domestic financial system, said Zhou Maohua, an analyst with China Everbright Bank.

China has been stepping up efforts in recent years to contain financial risks, tightening the regulation of the country's financial holding companies and taking over financial firms indulged in illegal practices that threatened their solvency.

The PBOC and the CBIRC have recently established a countercyclical capital buffer mechanism as part of efforts to further promote the sound operation of banks.

The country will further strengthen the regulations on systemically important financial institutions covering banks, insurers and securities firms, and roll out recovery and disposal plans for these institutions, Pan said.