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'Too big to fail' Chinese banks face $400 billion capital call

HONG KONG - China's four biggest lenders may have to raise up to $400 billion in new capital to conform with onerous new post-crisis capital rules a global regulator said on Monday they would have to fall into line with.

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A bank customer walks next to advertisements for credit cards in the centre of Shanghai. REUTERS/Nir Elias/Files

HONG KONG - China's four biggest lenders may have to raise up to $400 billion in new capital to conform with onerous new post-crisis capital rules a global regulator said on Monday they would have to fall into line with.

The announcement by international banking watchdog the Financial Stability Board (FSB) represents a coup for Western banks, who had complained that a proposed exemption for emerging market institutions would give China's state lenders an unfair competitive advantage as they continue to expand overseas.

The decision could also put pressure on Chinese banks to begin paring back lending at a time when the government is pushing them to prop up growth amid a broader slowdown.

The FSB outlined its final rules for ending "too big to fail" banks on Monday, a key pledge made by the G20 after governments spent more than $1.5 trillion rescuing financial firms during the 2008 financial crisis.

The reforms require the world's systemically important 30 banks, known as GSIBs, to issue a buffer of capital that can be written down to raise funds if the bank goes bust.

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This layer of Total Loss Absorbing Capital, or TLAC, is largely comprised of bonds and comes on top of banks' core Basel capital requirements.

China has four GSIBs, Bank of China, Agricultural Bank of China, Industrial and Commercial Bank of China , and China Construction Bank which was added to the GSIB list only last week.

The country's regulators lobbied hard for an open-ended exemption from TLAC, arguing its capital markets are not deep enough to absorb so much issuance - leading the FSB to propose an exemption for emerging markets banks in February.

Global banks opposed the idea, arguing it would give China's Big Four lenders a more competitive cost of capital.

 

LONG WINDOW

On Monday, the FSB scrapped the emerging markets waiver in favour of a much longer phase-in period.

"At face value, this final version looks a lot fairer," said Royce Miller, a partner at law firm Freshfields in Hong Kong. "There were powerful voices at the table, and valid arguments, on both sides and this is a compromise which means the Chinese banks have to comply by fixed deadlines, but they have a very long window."

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GSIBs from developed markets will be required to meet a minimum TLAC requirement of at least 16 percent of the group's risk-weighted assets (RWAs) from January 2019, and at least 18 percent from January 2022, while this time frame is 2025 and 2028 respectively for emerging markets banks.

Industry insiders said the Big Four banks would be required to raise between $350 and $400 billion in total to comply with the rules, although they were unlikely to do this until after 2020.

Shares in these Big Four banks fell an average of 1.7 percent in Hong Kong trading on Tuesday, slightly underperforming the benchmark Hang Seng index.

None of the banks immediately responded to requests for comment.

Although Chinese banks' raised record levels of capital last year and boast healthy average core equity ratios of around 12-15 percent, this buffer is under growing pressure as lending growth outstrips these firms' ability to retain earnings.

The capital requirements are, however, unlikely to cause a shock to the system, said Matthew Smith, China banks analyst at Macquarie, citing the banks' generous deadline.

"By then, the capital market in China should be more developed to accommodate these sizable fund raising activities."

But the new requirements are likely to spur a change in Chinese banks' behavior, as they look to rely more on wholesale funding, potentially pare down risk-weight assets, and become more familiar with TLAC debt instruments such as subordinated bonds, said bankers.

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"The Chinese banks have won a stay of execution," said one Hong Kong banker who has helped Chinese banks raise capital. "But they are going to have to become extremely active in the capital markets."

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