PBOC: Lowering Banks’ Capital Adequacy Hurdle Would Be ‘Fooling Ourselves’

What’s new: There is no need for China to lower regulatory requirements on banks’ capital adequacy ratio, and banks should find practicable ways to replenish their capital, a senior official at the central bank said.

The capital adequacy ratio of the banking sector fell to 14.21% as of the end of June, down 0.43 of a percentage point from the start of this year but still above the regulatory standard of 10.5%, Liu Guoqiang, vice governor of the People’s Bank of China, said Tuesday at a press conference.

Lowering regulatory requirements for banks’ capital adequacy would be “fooling ourselves and others,” Liu said.

The PBOC is working with relevant departments to improve the system and mechanism of bank capital replenishment and is supporting banks to replenish capital through multiple channels and innovative capital instruments, such as perpetual bonds, second-tier capital bonds and local government special bonds, Liu said.

The background: In the first half of this year, amid the coronavirus pandemic, downward pressure on the economy increased, and the profitability of the banking sector declined year-on-year. This made it harder for many already strapped smaller banks to replenish capital through internal channels.

Authorities are studying allowing local governments to use proceeds from special-purpose bonds to buy convertible bonds, secondary capital bonds and convertible agreement deposits from small and medium-sized banks to help commercial banks shore up capital, Caixin learned from exclusive sources.

Quick Takes are condensed versions of China-related stories for fast news you can use. To read the full story in Chinese, click here.

Contact reporter Denise Jia (huijuanjia@caixin.com) and editor Bob Simison (bobsimison@caixin.com)

Support quality journalism in China. Subscribe to Caixin Global starting at $0.99.