Nov 30, 2019 03:58 AM

China’s Regulator Revises Rules on Banks’ Capital Replenishment Tools

The China Banking and Insurance Regulatory Commission issues a guideline on banks' capital replenishment tools. Photo: VCG
The China Banking and Insurance Regulatory Commission issues a guideline on banks' capital replenishment tools. Photo: VCG

China’s banking regulator clarified criteria for innovative capital instruments for commercial banks, which are under increasing capital pressure following a national deleveraging campaign.

In a guideline issued Friday, the China Banking and Insurance Regulatory Commission (CBIRC) laid out the capital loss absorption sequence for different classes of capital instruments, addressing questions such as which get paid first between holders of perpetual bonds and preferred stock in case of a liquidation.

Under the CBIRC’s rules, perpetual bonds and preferred stock will be paid at the same time as they are both tier-1 capital replenishment tools. The commission ruled that when a trigger event occurs, all of the same class of capital instruments shall initiate a write-down or conversion at the same time in proportion to the total amount of capital instruments of that class, before the write-down or conversion of the next level of capital instruments.

The guideline also broadens the setting for trigger events for other tier-1 capital replenishment tools, providing more incentive to holders of banks’ perpetual bonds and preferred stock and making it easier for banks to issue such securities.

Trigger events include those that affect going-concern status and those that make banks unable to survive. The former occurs when the core tier-1 capital ratio of a commercial bank falls to 5.125% or below. The latter refers to the earlier occurrence of two situations: The CBIRC believes the bank will not survive without a write-down or debt conversion, or the bank cannot survive without a public capital injection, according to the guideline.

Specifically, tier-1 capital instruments that are classified as equity must set nonsurvivable trigger events, and those are classified as liabilities shall set both nonsurvivable trigger events and going-concern trigger events. Tier-2 capital instruments must set nonsurvivable trigger events.

Currently when banks issue perpetual bonds, they stipulate only what would happen if there are going-concern events, which is when their core tier-1 capital ratio falls to 5.125% or below. Under the new guideline, banks need only to set nonsurvivable trigger events when issuing perpetual bonds, which means a higher triggering threshold.

Perpetual bonds are a type of security that doesn’t have a fixed maturity date and can make interest payments to investors forever if needed. Issuing them would be intended to tackle the challenges banks face in meeting capital requirements for absorbing losses.

In December 2018, China’s cabinet-level Financial Stability and Development Committee said it was studying measures to help banks replenish capital, including borrowing via perpetual bonds, as soon as possible.

Following the cabinet’s green light on perpetual bonds, banks including the big four state-owned lenders and private commercial banks have issued 12 perpetual bonds, raising a total of 496.6 billion yuan ($70.6 billion), as of Friday.

Contact reporter Denise Jia (

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