China launches new regulatory rules to mitigate financial risk

China officially launched regulatory rules to secure capital cushions in big banks to absorb losses and prevent systemic risks in line with global standards, government officials said.

Experts called this set of new rules "the Chinese version of the Total Loss Absorbing Capacity, or TLAC", under which eligible capital and debt tools can be used for bailouts if the global systemically important banks (G-SIBs) run into trouble.

The rules will take effect on Dec 1, an announcement from the Ministry of Finance read on Monday. All G-SIBs in China should meet the lowest standards for the risk weighted ratio and the leverage ratio - 16 and 6 percent — at the beginning of 2025. Higher requirements for these two ratios - 18 and 6.75 percent — should be satisfied at the beginning of 2028.

"It means China's regulations of G-SIBs is promoted further in line with international standards, which also provides an important reference for Chinese financial regulators to improve the supervision of domestic big banks next," said Wen Bin, chief researcher at China Minsheng Bank.

The rules of TLAC were jointly issued by the central bank, the banking regulatory body and the Ministry of Finance. The four biggest Chinese banks - Bank of China, Industrial and Commercial Bank of China, Agricultural Bank of China and China Construction Bank — are on the regulatory list.

A draft of the rules was published on Sept 30, 2020. The final version is almost the same as the draft, and will improve the risk management capability of Chinese large banks and the stability of the whole banking system, analysts said.

Compared with the draft, the Ministry of Finance has become the joint issuing department for the measures, which show the ministry has been more active in performing the responsibilities of a major investor of State-owned financial institutions, which also shows the management of State-owned financial capital has been continuously optimized, Wen said.

As for the four G-SIBs in China, they should innovate new tools under the TLAC framework to meet the standards, Wen added, saying a reliance on profits to supplement capital may constrain banks' investment and the growth of business.