China's Big Banks Have Longest Road to Meet Loss-Absorbing Needs

Updated on
  • Four too-big-to-fail lenders have nine years to reach 16% TLAC
  • Banks need to issue $290 billion bonds to cover shortfall

China’s giant banks got a nine-year breather to issue the securities they need to meet standards for loss absorbency laid down by the Financial Stability Board, an acknowledgment of the challenge this implies for the largely deposit-funded lenders.

The country’s four lenders on the FSB’s list of the world’s too-big-to-fail banks have until 2025 to reach total loss-absorbing capacity of 16 percent of risk-weighted assets, six more years than their peers from developed markets. The ratio rises to 18 percent in 2028. Under the FSB’s original proposals, banks headquartered in emerging markets were to be exempted from total loss absorbing requirements.

In the final version of the standards published Monday, the institutions have been included to ensure that internationally active banks have a level playing field. The three biggest, Agricultural Bank of China Ltd., Bank of China Ltd., and Industrial & Commercial Bank of China Ltd. may have to issue as much as 269 billion euros ($290 billion) of eligible securities by then, based on the FSB’s calculations. The number will rise by the needs of China Construction Bank Corp., which was added to the FSB’s list last month.

“The Chinese banks have huge deposit bases to fund lending and therefore don’t have the requirement to carry the same levels of senior debt as global peers,” said Paul Smillie, a credit analyst at ColumbiaThreadneedle in Singapore. “Forcing the Chinese to conform within the same timescale would lead to a deluge of supply and also effectively penalize the Chinese for having liquid, deposit funded balance sheets.”

Phase-in Period

The phase-in period for Chinese banks may shrink if, in the next five years, the aggregate size of the nation’s corporate bond market exceeds 55 percent of economic output. There are currently about $3 trillion of corporate bonds outstanding, according to the Bank for International Settlements, compared with an economy of about $10.2 trillion.

Banks in developed markets will need to issue an additional 269 billion euros of eligible securities by 2022 to meet the FSB’s TLAC requirements, according to estimates by Roger Francis, an analyst at Mizuho International Plc in London. Francis’s analysis excludes the Chinese banks and holding company notes replacing senior funding from operating companies as bonds mature.

The size of bond markets in the developed economies makes the task easier for those countries’ lenders. With the exception of 2011, banks in developed markets have issued more than 1 trillion euros of senior bonds in dollars, euros, Swiss francs and pounds every year since 2009, data compiled by Bloomberg show. This year and last, they issued more than 1.5 trillion euros of the debt, a sign they won’t have much difficulty issuing the extra securities.

In contrast, Bank of China has about 52 billion euros of bonds outstanding on total assets of more 2.3 trillion euros, Bloomberg data show. Agricultural Bank has 40.6 billion euros of bonds out and assets of 2.5 trillion euros.

The Hong Kong-traded shares of Agricultural Bank fell 1 percent as of the 12:30 p.m. break, while Bank of China’s dropped 1.4 percent. The benchmark Hang Seng Index declined 1.2 percent.

— With assistance by Jun Luo, and Russell Ward

(Updates shares in final paragraph.)
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