China Telling Their Banks To Get Ready For A BIG One

China is seeking to avoid a repeat of its last banking crisis, when the government spent more than $650 billion over a decade to bail out banks after years of state-directed lending. Photographer: Nelson Ching/Bloomberg

China’s banking regulator plans to require lenders to set up procedures to allow them to restore their finances in the event of a crisis, a person with knowledge of the matter said.

Banks deemed systemically important, including Industrial & Commercial Bank of China Ltd., may have to sell debt convertible into equity, the person said, declining to be identified because the regulator’s deliberations are private. Regulators will also be given broader powers to supervise those lenders in an effort to discover risks early, the person said.

China is seeking to avoid a repeat of its last banking crisis, when the government spent more than $650 billion over a decade to bail out banks after years of state-directed lending. Concerns that a deterioration of lenders’ asset quality could derail the world’s fastest-growing major economy surfaced after credit expansion surged to a record 96 percent in 2009, prompting the banking regulator to tighten capital rules.

“The regulator is incorporating a crisis mentality into its daily supervision of banks to make sure they have everything in place when big trouble comes,” said Tang Yayun, a Shanghai- based analyst at Northeast Securities Co.

China’s major banks cut their combined bad-loan ratio to 1.15 percent as of Dec. 31 from 17.2 percent in 2003, when the China Banking Regulatory Commission was created, official data show.

‘Bail-in’ Debt

A CBRC official, who declined to be identified citing agency policy, said in a text message response to questions that the regulator is studying the issue of self-rescue mechanisms.
ICBC, China Construction Bank Corp., Agricultural Bank of China Ltd., Bank of China Ltd. and Bank of Communications Co. -- the nation’s five largest lenders -- are currently designated as systemically important by the Chinese government, the person said. Spokespeople for the banks either declined to comment or weren’t immediately available.

ICBC, the world’s largest bank by market value, fell 0.2 percent at the midday break in Hong Kong. Agricultural Bank dropped 1 percent and Bank of China slipped 0.7 percent.

Setting up “self-rescue” mechanisms is part of efforts to make sure equity- and bondholders take greater responsibility for salvaging a bank should it encounter financial difficulties, the person said. One possible measure is selling “bail-in” debt, the person said without elaborating.

“Bail-in debt is a positive to banks because it gives them a new channel for raising funds, given that big banks will be subject to higher capital requirements,” Tang said. Such debt could be counted as supplementary capital, according to Tang.

Law Revisions

Global regulators spent the past two years devising ways to ensure taxpayers won’t be on the hook in the event of another banking crisis.

The Basel Committee on Banking Supervision announced last month that hybrid debt securities need to include triggers that force banks to convert them into common stock or write them off, averting government bailouts by providing capital buffers that can fund a “bail-in” by stakeholders if a bank gets into trouble. Hybrid securities blend characteristics of equity and debt.

The U.S. spent almost $500 billion bailing out its financial institutions during the global financial crisis, according to data compiled by Bloomberg. China holds majority stakes in its four largest publicly traded banks.

Regulators will have the power to decide when a bank in trouble must activate its self-rescue mechanisms, the person said. The government may seek revisions to China’s Commercial Bank Law to accommodate the new requirements, according to the person.

Capital Ratios

China’s systemically important banks may also be subject to higher liquidity standards than domestic competitors, and may be required to have lower concentration of loans to a single borrower, the person said.

Should a troubled lender’s own measures fail to revive it, the government would seek to broker an acquisition by a healthy bank to avoid the consequences of a closure, providing support with tax and credit policies if needed, the person said.

The CBRC may raise the five biggest state-controlled lenders’ capital adequacy requirement to as high as 14 percent, from 11.5 percent currently, if credit growth is deemed excessive, a person familiar with the matter said last month. That includes an additional 1 percent of capital charged on them to reflect their systemic importance, the person then said.

Chinese banks’ weighted average capital adequacy ratio, a measure of their ability to withstand financial stress, rose 0.8 percentage point last year to 12.2 percent as of Dec. 31, the CBRC said last week on its website.

New loans in China more than doubled from December to 1.04 trillion yuan ($158 billion) in January, the central bank said on Feb. 15. Credit expansion decreased from 1.39 trillion yuan in the year-earlier month. Banks typically expand credit at a faster pace at the start of a year.