China's Largest Banks Launch First Sale of Special Loss-absorbing Debt Instruments - Latest Global News

China’s Largest Banks Launch First Sale of Special Loss-absorbing Debt Instruments

Stay up to date with free updates

China’s biggest banks have started selling a special type of loss-absorbing debt for the first time, moving closer to meeting international requirements to prevent a repeat of the 2008 financial crisis.

The Industrial and Commercial Bank of China is selling 40 billion RMB ($5.5 billion) worth of so-called Total Loss Absorbing Capacity bonds this week, according to a report. The Bank of China also announced the pricing of its own RM30 billion sale on Thursday.

The bonds are part of a long-term push by international regulators to strengthen banks’ balance sheets by requiring them to issue instruments that are at risk of losses before other highly sensitive bank liabilities, particularly deposits.

China’s banking sector, the world’s largest by assets, has five of 30 institutions worldwide classified as globally systemically important by the Financial Stability Board, an international regulator based in Basel.

According to FSB requirements, banks will need a total loss-absorbing capacity of 16 percent of risk-weighted assets by early 2025. TLAC bonds differ from capital instruments such as additional Tier 1 bonds, which are also designed to absorb losses.

Fitch Ratings estimated last month that TLAC and other capital requirements for the five banks in China will increase to $1.6 billion by early 2025.

Vivian Xue, director of the financial institutions group at Fitch Ratings in Shanghai, said China’s pilot issuance of TLAC was likely delayed by Covid-19 disruptions as well as “market conditions.”

She added that since 2017, most bank capital issuances from China have taken place on the mainland, rather than internationally.

China’s financial system became more insulated from the rest of the world during the pandemic and cross-border activity fell sharply as relations with the US deteriorated. A prolonged real estate downturn has also raised concerns about China’s overall economy.

International banks have struggled to remain active on the mainland, where domestic securities firms and brokers dominate financial markets.

According to a bond issuance circular, none of the 18 underwriters of the Bank of China bond are international financial institutions. ICBC’s offering also does not list international groups.

China’s five largest banks all reported profits and a flat level of non-performing loans in their quarterly results last month, although their margins showed signs of pressure.

In Europe, losses in AT1 bonds during Credit Suisse’s failure last year prompted scrutiny of the regulatory system and its impact on fixed-income investors.

The bank was removed from the FSB list of global systemically important financial institutions. China’s Bank of Communications joined in November.

Sharing Is Caring:

Leave a Comment