Banks urged to trim losses with new debt instruments

Chinese 100 yuan banknotes are seen in a counting machine while a clerk counts them at a bank in Beijing, March 30, 2016. [Photo/Agencies]

Moves to ensure regulatory compliance and boost financial sector opening-up 

Chinese financial regulators will continually encourage commercial banks to develop innovative debt instruments and replenish capital, in order to meet regulatory standards and strengthen their ability to absorb losses, said senior officials.

Financial regulators will support four Chinese banks on the global systemically important banks (G-SIBs) list to issue debt instruments overseas, to enhance their total loss-absorbing capacity (TLAC), said a senior official from the central bank's financial stability bureau.

The measure will further improve the opening-up of China's financial sector, and ensure big banks can meet regulatory requirements, said the official.

These G-SIBs banks should improve capital adequacy level through measures including bond issuance, capitalization of outstanding credit, and cutting down the increment of business, he said.

"Regulatory departments should soon clarify debt instruments' standards," he added. The multiple channels to raise funds will include non-fixed term capital debentures, debt-to-equity swaps and qualified TLAC debt tools.

The Office of the Financial Stability and Development Committee hosted a meeting on Tuesday, focusing on researching multiple channels to supplement commercial banks' capital, according to a statement posted on the People's Bank of China website.

The central bank is in charge of the committee's office. It has also promoted sales of "perpetual bonds" as soon as possible, the statement said.

Perpetual bonds are financial instruments in which their investors can receive interest payments as long as the bond is held, with no maturity date. The bond has functions much like dividend-paying stocks or certain preferred securities.

China started to issue perpetual bonds since 2013, and the issuers are mainly State-owned enterprises.

Perpetual bonds will help commercial banks increase their capital adequacy ratio, as it can provide long-term funds and enhance the regular expansion of banks' business and capital, said Wen Bin, chief economist with China Minsheng Bank.

"Chinese banks have faced greater pressure in recent years to supplement capital, especially when the tightening regulations require off-balance-sheet debts to return onto the balance sheet," he said.

The slowdown of banks' profit growth and a slump in share prices are making it harder for banks to raise money, said Wen.

By the end of this year, the four G-SIBs－Industrial and Commercial Bank of China, Bank of China, China Construction Bank and Agricultural Bank of China, should achieve 11.5 percent of the capital adequacy ratio, and the other banks should keep the ratio higher than 10.5 percent.

The central bank's latest Financial Stability Report said Chinese G-SIBs now are facing pressure to meet the TLAC standards.

But in the long term, the standards can help to improve Chinese financial system's resilience and reduce the leverage level of the large commercial banks, it said.