China Construction Bank joins global list of systemically risky banks

PUBLISHED : Wednesday, 04 November, 2015, 12:03am
UPDATED : Wednesday, 04 November, 2015, 12:03am

The world's top financial stability watchdog on Tuesday added China's second largest lender to a list of banks required to raise more capital to buffer against systemic risks.

The decision from the Financial Stability Board, an arm of the Bank for International Settlements, to pull China Construction Bank on to the list of 30 financial institutions also showed a growing awareness of the global risks of the domestic financial discord in China.

Construction Bank was the only bank added this year to the list of so-called globally systemically important banks, or G-SIBs, following Agricultural Bank of China last year. All four of China's state-owned national commercial banks, including Bank of China and Industrial and Commercial Bank of China, are now on the list.

Being on the list means the Chinese banks will be required to raise an additional 1 per cent of core regulatory capital on top of other baseline requirements.

Construction Bank's common equity tier-one ratio was 12.7 per cent at the end of September, the strongest capital position among China's biggest banks and above the 11.5 per cent target that global banks of its calibre will need to achieve by January 1, 2018.

As a globally systemically important bank, Agricultural Bank of China's core capital adequacy was behind its Chinese peers at the end of June. The bank posted a common equity tier-one ratio of 9.72 per cent at the end of the third quarter.

The bank's addition left some industry watchers scratching their heads late last year. At the time, the lender had more than 20,000 domestic branches but less than 10 abroad, leading to questions over why the FSB would include it with banks with thousands of branches abroad.

The addition showed that the FSB recognised the global risks posed by a domestic banking crisis in China.

Non-performing loans have increased rapidly in China's banking sector. Agricultural Bank's non-performing loan ratio broke 2 per cent by the end of September, leading the sector in bad debt. Analysts have said that many bad loans go unrecognised and unreported by the banks and the sector's true bad debt rate is likely much higher than official figures show.

New York University's Volatility Laboratory last year said the cost of bailing out China's banks from a crisis was about US$520 billion, up four times over the past three years.