China will support innovation of financial instruments to further expand channels for capital replenishment at commercial banks, looking to ease lenders’ capital pressure and improve their ability to serve the real economy.
The country’s financial regulators and the central bank jointly announced the decision on March 12 in a notice posted on the website of the China Banking Regulatory Commission.
Regulators said they will improve the supporting rules to create favorable conditions for banks to replenish capital via instruments including non-fixed-term bonds and convertible tier 2 bonds.
In addition to simplifying procedures of regulatory approval for the issuance of such instruments, they will also expand the community of institutional investors to the social security fund, insurance companies, securities brokerages and fund management firms.
On the same day the decision was made public, Agricultural Bank of China Ltd, the country’s third-largest commercial lender by assets, announced a plan to raise up to 100 billion yuan ($15.8 billion) by issuing 27.47 billion A-shares to a target group that includes existing shareholders, such as the Ministry of Finance and the State-owned investment company Central Huijin Investment Ltd. All the money raised, with relevant issuance expenses deducted, will be used to replenish the bank’s core tier 1 capital.
Several other listed banks are taking similar actions. On March 5, China’s securities regulator gave the nod to the Wujiang Rural Commercial Bank headquartered in Suzhou, Jiangsu province, for its plan to raise 2.5 billion yuan through the issuance of A-share convertible bonds. Bank of Jiangsu Co Ltd also announced on Feb 3 it will issue A-share convertible bonds of up to 20 billion yuan.
“Both large and small banks are facing pressure for capital replenishment due to different reasons,” said Xiong Qiyue, a research fellow at the Institute of International Finance at the Bank of China Ltd. “Large banks, especially global systemically important banks, will follow higher capital requirements according to international standards. Small banks have to set aside more loan loss provisions for some previously off-balance sheet activities, which will appear on their balance sheet because of regulatory tightening on shadow banking.”
If banks experience a relatively huge capital pressure, their ability to offer credit will become limited and this will cause a lack of financial support to the real economy. So regulators need to expand channels for banks’ capital replenishment to ensure that banks will satisfy the financial demands of the real economy, said Zeng Gang, director of banking research at the Chinese Academy of Social Sciences’ Institute of Finance and Banking.
In the past, as China has limited instruments for capital replenishment, additional tier 1 capital, a measure to describe the capital adequacy of a bank, accounted for about 5 percent of the total capital at China’s four largest commercial banks on average. However, the average for global systemically important banks is around 15 percent, said Xiong with the Bank of China.
He noted that large banks that have stronger abilities are likely to explore innovative instruments for capital replenishment, while small banks will still rely on traditional measures.
According to China’s banking regulations, for global systemically important banks, the capital adequacy ratio should not be lower than 11.5 percent at the end of 2018. The tier 1 capital adequacy ratio and core tier 1 capital adequacy ratio should be at least 9.5 percent and 8.5 percent respectively. The capital requirements for other banks will be 1 percentage point lower.