We estimate China's four biggest banks need to address a US$100 billion shortfall in loss-absorbing capital by year end. The country's deposit insurance fund will be an important resource to bridging this funding gap.
What's happening
China's four biggest banks have not met their targets on total loss-absorbing capacity (TLAC) requirements yet. The first phase of this regime, which is part of global rules set out by the Financial Stability Board, comes into effect on Jan. 1, 2025. By this deadline, China's four biggest banks need to accumulate TLAC capital equal to 20% of each bank's risk weighted assets (RWA), including capital surcharges. The situation:
- The four banks have built up their regulatory capital bases to 18.5%-19.3% of RWA by the end of the first half of 2024.
- The lenders have raised incremental TLAC capital through the issue of noncapital TLAC bonds this year.
- However, we estimate lenders need an additional Chinese renminbi (RMB) 738 billion in TLAC, based on their financials as of end-June 2024.
Why it matters
The Big Four banks need capital to fund lending growth. They've maintained strong loan expansion to support China's economic growth, even as bank lending generally continued to decelerate in the first half of 2024. The Big Four will need to maintain their capital buffers as they continue lending, to be in compliance with the TLAC rules, however:
- A continued margin squeeze will likely weigh on the four banks' ability to internally fund their TLAC needs in the next two years.
- It could be challenging for the market to absorb RMB700 billion-plus TLAC securities from these four banks in the next few months.
China's Deposit Insurance Fund (DIF) will help fill the gap.
- China's Big Four will likely be able to count DIF toward their TLAC, on the view that the fund could be used to support a bank resolution, if needed.
- Banks may include DIF, up to 2.5% of an individual bank's RWA in the first phase, thus mitigating their TLAC shortfall.
- China's global systemically important banks (G-SIBs) are likely to follow Japan's G-SIBs. The latter has fully utilized Japan's DIF to boost their TLAC buffer.
What comes next
How much can China's DIF count toward TLAC? The fund is likely to grow to RMB100 billion-RMB110 billion by year-end, in our estimate. The TLAC gap will fall to about RMB300 billion-RMB340 billion, if each of the Big Four banks count the full amount of the balance in the DIF as part of their TLAC funding (see table). The gap could be cut to about RMB210 billion if the DIF outflow is muted in 2024.
Table 1
| How China's Big Four might close the TLAC gap as the phase-one deadline looms | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ICBC | CCB | ABC | BOC | Total of 4 G-SIBs | ||||||||
| TLAC requirement at end-2024 (% of RWA) | 20.00 | 20.00 | 20.00 | 20.00 | - | |||||||
| June 2024 capital adequacy ratio (%) | 19.16 | 19.25 | 18.45 | 18.91 | - | |||||||
| Gap (bps) | 84.00 | 75.00 | 155.00 | 109.00 | - | |||||||
| RWA at June 2024 (tril. RMB) | 25.12 | 21.69 | 22.11 | 18.54 | - | |||||||
| Static TLAC capital gap without DIF and YTD TLAC issuance (bil. RMB) | 211.04 | 162.68 | 342.69 | 202.08 | - | |||||||
| TLAC noncapital bonds issued YTD 2024 (bil. RMB) | 40.00 | 50.00 | 50.00 | 40.00 | - | |||||||
| Static TLAC capital gap without DIF inclusion (bil. RMB) | 171.04 | 112.68 | 292.69 | 162.08 | 738.49 | |||||||
| DIF funding scenario (bil. RMB) | 105.00 | 105.00 | 105.00 | 105.00 | - | |||||||
| Static TLAC capital gap after factoring in DIF (bil. RMB) | 66.04 | 7.68 | 187.69 | 57.08 | 318.49 | |||||||
| TLAC--Total loss-absorbing capacity. RMB--Chinese renminbi. ICBC-- Industrial and Commercial Bank of China Ltd. CCB--China Construction Bank Corp. ABC--Agricultural Bank of China Ltd. BOC--Bank of China Ltd. RWA--Risk weighted assets. Bps--Basis points. DIF--Deposit Insurance Fund. YTD--Year to date. Sources: Company reports, S&P Global Ratings estimates. | ||||||||||||
A credible commitment to support resolution funding costs will be important to bridging the TLAC shortfall. The key matter will be the extent to which the DIF can be used to fund a bank resolution in an emergency. We expect DIF will continue to grow to help Chinese G-SIBs meet their TLAC requirements., However, the fund accumulation would likely be at a slow pace in the next few yearsbecause of ongoing reform of rural financial institutions and small financial institutions.
Background In Brief
China's DIF protects depositors' savings in banks, up to RMB500,000 per bank, per customer. China's DIF is funded by premiums paid by banks against their insured deposits. Major uses of the fund have included RMB68 billion used to resolve risks related to the failure of Baoshang Bank Co. Ltd. in 2020.
The Big Four banks are: Agricultural Bank of China Ltd., Bank of China Ltd., China Construction Bank Corp. and Industrial and Commercial Bank of China Ltd.
Editor: Jasper Moiseiwitsch
Related Research
- China's TLAC Debuts: The Road Ahead, May 20, 2024
- Realigned Capital Rules To Cut China Banks' TLAC Needs, March 7, 2024
This report does not constitute a rating action.
| Primary Credit Analyst: | Michael Huang, Hong Kong + 852 25333541; michael.huang@spglobal.com |
| Secondary Contacts: | Xi Cheng, Shanghai + 852 2533 3582; xi.cheng@spglobal.com |
| Ryan Tsang, CFA, Hong Kong + 852 2533 3532; ryan.tsang@spglobal.com | |
| Research Assistant: | Jiawen Zhang, HANGZHOU |
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