THE banking regulator planned 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., could have to sell debt convertible into equity, the person said, declining to be identified because the regulator s deliberations are private. Regulators would 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 US$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 (CBRC) was created, official data show.
A CBRC official, who declined to be identified citing agency policy, said in a text message response to questions that the regulator was 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.
Setting up self-rescue mechanisms was part of efforts to make sure equity and bondholders took greater responsibility for salvaging a bank should it encounter financial difficulties, the person said. One possible measure was selling bail-in debt, the person said without elaborating.
Bail-in debt is a positive for 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.
China s systemically important banks could also be subject to higher liquidity standards than domestic competitors, and could 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 could raise the five biggest State-controlled lenders capital adequacy requirement to as high as 14 percent, from 11.5 percent currently, if credit growth was deemed excessive, a person familiar with the matter said last month. That included 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 points last year to 12.2 percent as of Dec. 31, the CBRC said last week on its Web site.(SD-Agencies)
