ICBC told to hold extra capital to avert crisis

Mainland lender joins global regulator's revised list of too-big-to-fail banks while buffers drop at Citigroup, Deutsche Bank and BNY Mellon

PUBLISHED : Tuesday, 12 November, 2013, 11:21am
UPDATED : Wednesday, 13 November, 2013, 2:22pm

Industrial and Commercial Bank of China was added to the list of too-big-to-fail banks as global regulators revised the roster of lenders that must hold extra capital to prevent another financial crisis.

ICBC, the mainland's largest bank by assets, was the only firm joining the updated list of systemically important firms released on Monday by the Financial Stability Board. Lenders whose capital buffers were cut from last year included Citigroup, Deutsche Bank and Bank of New York Mellon, while Credit Agricole was told to add more.

Regulators are ranking financial firms by their potential to cause a global meltdown and demanding bigger financial cushions from them to avert any repeat of the 2008 credit freeze. While ICBC is the world's most profitable lender, bad loans are rising at China's top banks after a five-year credit spree. As for Western companies, Pri de Silva, an analyst at CreditSights, said he was surprised by some of the cuts.

Were these institutions "less interconnected than they were a year ago? That doesn't seem likely", said de Silva. Some lenders might have gone "to the powers that be and made the case that they should be viewed from a different lens".

The revised list leaves only JPMorgan Chase, the largest United States bank by assets, and London-based HSBC, Europe's biggest by market value, in line to face the top 2.5 per cent surcharge. Citigroup and Deutsche Bank must meet a 2 per cent target after previously being in the top category. ICBC's surcharge is 1 per cent, the same as Bank of China, which was already included last year.

BNY Mellon, the world's largest custody bank, also dropped into the 1 per cent cohort. Only Credit Agricole was saddled with an increase, with the surcharge level rising to 1.5 per cent from 1 per cent.

The surcharge represents the amount of capital a bank must have beyond the minimums already set by international regulators to fortify banks against their own losses or an external economic shock. Officials decided in 2010 to more than triple thresholds for the core capital that banks should keep to absorb losses.

The Financial Stability Board produces the list in preparation for capital rules scheduled to be phased in from 2016. Alterations to the list were driven by "data quality improvements, changes in the methodology and changes in underlying systemic importance", it said.

ICBC said yesterday it would not need to raise more capital because its ratios exceeded minimum regulatory requirements. As a global systemically important bank, it said it needed to meet a minimum core tier-1 capital ratio of 8 per cent.

The lender had a ratio of 10.48 per cent at the end of June, while BOC's was 9.27 per cent, stock exchange filings in August showed. Those levels were higher than the 8.5 per cent China's banking regulator requires them to hold by the end of 2018.

"ICBC is not facing a huge issue in maintaining its capital level, but it does face pressure," said Chen Xingyu, an analyst at Phillip Securities. "It needs capital to support loan growth."