Banking & finance
Get more with myNEWS
A personalised news feed of stories that matter to you
Learn more
The Industrial and Commercial Bank of China and 18 other Chinese banks will face increased regulatory requirements as of December 1. Photo: Reuters

China’s ‘enhanced regulation’ on banks sees capital buffer increased amid greater risk exposure

  • Total of 19 banks will be subject to stricter regulatory requirements as of December 1 – a move that analysts say is in line with market expectations
  • Decision by regulators comes as the nation faces a rise in bad loans that is coinciding with a national economic slowdown
China is ramping up efforts to protect the state-controlled financial system by issuing its first list of too-big-to-fail banks – a move that comes amid a rise in bad loans that coincides with a national economic slowdown.

Those 19 banks – dubbed domestic systemically important banks (D-SIBs) – will be required to increase their capital requirement by 0.25 to 1 percentage points. These stricter rules will strengthen those banks’ risk resistance while helping maintain financial stability, analysts said.

Mid- to lower-tier banks will face the biggest policy changes, having to add additional capital-requirement buffers that were usually concerns for bigger banks, as the central bank has stepped up its scrutiny of Chinese lending institutions.

“It’s a sign of enhanced regulation,” said Ding Shuang, chief Greater China economist with Standard Chartered Bank. And it will pave the way for banks to tackle their specific problems, he added.

The new regulation, which takes effect on December 1, comes amid growing concerns that property curbs and financial risks could spread across markets, and as property developer Evergrande is reeling from a massive debt crisis.

The tighter capital, leverage ratio and compliance requirements were jointly released on Friday by the People’s Bank of China (PBOC) and the China Banking and Insurance Regulatory Commission. All 19 banks were divided into four tiers, based on importance. Regulators said there were five tiers, but no bank appeared in the fifth tier.

The “Big Four” state-owned banks – Industrial and Commercial Bank of China; China Construction Bank; Agricultural Bank of China; and the Bank of China – appear in the fourth tier. That designation means that they face an additional capital requirement of 1 percentage point, which ensures they have more cash on hand and less lent out – effectively a bigger buffer to moderate the impact of any potential financial black swan event.

Since they are also on the list of global systemically important banks designated by the Financial Stability Board – an international body that regulates and makes recommendations regarding the global financial system – those four top-tier banks already have a capital buffer of 1 to 1.5 percentage points, so they will not have to make many wholesale changes.

The remaining 15 banks – including two other state-owned national banks, nine joint-stock commercial banks and four city commercial banks – face additional capital requirements ranging between 0.25 and 1 percentage point.

Citic Securities wrote in a note on Monday that the list was well in line with market expectations, and said it would help maintain financial stability in the medium- and long-term.

Taking into account the new rules, these 19 banks have to submit new contingency recovery and disposal plans in case their business falls into financial trouble, such as in the event of a banking system collapse. These plans will be submitted to the central bank for review and approval, and updated annually, according to the new rules.

Systemically important banks are big in scale, have complicated businesses and have strong connections with other financial institutions
People’s Bank of China

“These D-SIBs will receive stricter supervision and face higher requirements in terms of risk control, business sustainability and particularly capital,” said Wen Bin, chief analyst at China Minsheng Bank, which will see its additional capital requirement increase by 0.5 percentage points.

Overall, some banks are still facing pressure to replenish capital to meet their business demands, he warned.

This explains why the central bank is paying more attention to the contagion risks, and to preventing systemic risks.

“Systemically important banks are big in scale, have complicated businesses and have strong connections with other financial institutions,” the PBOC warned.

Compiling this list has long been on the regulator’s agenda, as its assessment standards were released last year. It was approved by the central bank on August 26, a week after it summoned Evergrande executives to “safeguard the stability of property and financial industries”.

Chinese regulators have stepped up action to ease market worries following the debt crisis of Evergrande, China’s largest property developer, sent shock waves through the investor community and even caught the attention of the US Secretary of State Antony Blinken.

The central bank on Friday attributed the crisis to the developer’s blind business expansion, and called it an individual case while stressing that China’s property sector is healthy overall.

On Sunday, PBOC Governor Yi Gang said at a virtual meeting of the Group of 30 that the developer’s trouble “casts a little bit of concern”, but added that authorities “can contain the Evergrande risk”.

This article appeared in the South China Morning Post print edition as: Beijing steps up scrutiny on banks