China sets new bank risk rules to prevent financial crisis
- Lenders will have to meet leverage and TLAC targets under regulation to come into effect in 2025
- Measures come as country wrestles with the threats to credit quality and capital markets
The standards were detailed in a total loss-absorbing capacity (TLAC) regulation released on Friday and vary according to the scale of the lender.
“[The regulation] will help improve the framework on how to regulate our globally systemically important banks and their risk disposal, and strengthen our ability to prevent systemic financial risks,” the People’s Bank of China said in a joint statement with the China Banking and Insurance Regulatory Commission and the Ministry of Finance.
Under the regulation, the lowest-tier banks will have to ensure that by 2025 at least 16 per cent of their risk-weighted assets are TLAC holdings and the leverage ratio is 6 per cent, rising to 18 per cent and 6.75 per cent respectively by 2028.
Higher-tier commercial banks will be asked to have a higher reserve, and countercyclical and buffer capital, which will diversify their financial instruments.
The absence of regulations in the past meant that the TLAC amount and leverage ratio of the lenders were not known.
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The regulation comes six years after the international body the Financial Stability Board released its own standards for global systemically important banks (G-SIBs) to ensure the lenders could absorb losses and recapitalise to limit the fallout from a global financial crisis.