Preventing “too big to fail” Mainland drafts stricter new capital rules

Chinese regulators are considering imposing additional capital requirements for systemically important banks in order to curb financial risks and maintain banking sector stability.

The People’s Bank of China (PBOC), together with the China Banking and Insurance Regulatory Commission (CBIRC), has drafted the “Additional Supervision Requirements for Systemically Important Banks (for Trial Implementation) (Draft for Public Comments)” for public consultation, according to a notice on the PBOC’s official website.

The draft has clear requirements for banks to improve their self-help capabilities and prevent the risk of “too big to fail”. According to the notice, the draft for public comment aims to “improve the regulatory framework for systemically important financial institutions in China and clarify additional regulatory requirements for systemically important banks”.

Based on international experience, the regulator plans to establish a system of additional supervisory indicators such as additional capital, additional leverage, liquidity, and large risk exposure.

Systemically important banks will be divided into five groups. Additional capital requirements of 0.25%, 0.5%, 0.75%, 1% and 1.5% will be applied to banks in groups one to five, respectively. It can be seen that, except for the fifth group, the additional capital requirements between the first and fourth groups differ by only 0.25%.

The draft opinion states that there is no differentiated additional capital requirement within the group for the time being. If a bank is identified as both a Chinese systemically important bank and a global systemically important bank, the additional capital requirements will not be superimposed and will be determined using the higher of the two.

In addition, systemically important banks should meet the additional leverage ratio requirement on top of the leverage ratio requirement. The additional leverage ratio requirement is 50% of its additional capital requirement, which is met by Tier 1 capital.

The exposure draft states that this move is intended to encourage banks to reduce systemic risk and avoid triggering moral hazard.

The opinion draft also says that systemically important banks need to meet the requirement on January 1 after one full natural year after entering the list or after a change in score resulting in a rise in the group. PBoC and CBIRC may subsequently adjust the additional capital requirements according to the actual situation and report to the Financial Stability Development Committee of the State Council for consideration and implementation.

The draft opinion also deliberately states that the additional capital requirements for systemically important banks in this provision and the additional capital requirements in the macro-prudential assessment (MPA) are not substitutes for each other.