HONG KONG • China's four biggest banks may have to raise up to US$400 billion (S$569 billion) to meet new global capital rules, an onerous task that could pressure them to slow down lending at a time when Beijing wants them to help prop up economic growth.
The Financial Stability Board (FSB) this week finalised rules for ensuring banks do not become "too big to fail", a pledge made by the Group of 20 economies after governments spent more than US$1.5 trillion rescuing financial firms in the 2008 financial crisis.
The rules will apply to China's major state lenders, a coup for Western banks which had complained that a proposed exemption for emerging market institutions would give the Chinese banks an unfair competitive advantage as they expanded overseas.
The reforms require the world's 30 systemically important banks - GSIBs - to hold a buffer of capital that can be written down to protect tax payers if the bank goes bust. This Total Loss Absorbing Capacity (TLAC) comprises a large chunk of debt and comes on top of banks' core Basel capital requirements.
China has four GSIBs: the Bank of China, the Agricultural Bank of China, the Industrial and Commercial Bank of China and China Construction Bank.
Industry insiders and analysts said the Big Four would need to raise a total of between US$350 billion and US$400 billion to comply with the rules, but they were unlikely to do this until after 2020.
China's regulators lobbied hard for an open-ended exemption from TLAC, arguing its capital markets were not deep enough to absorb so much issuance, leading the FSB to propose an exemption for emerging markets banks in February.
However, the FSB scrapped the emerging markets waiver in favour of a much longer phase-in period.
"At face value, this final version looks a lot fairer," said Mr Royce Miller, a partner at law firm Freshfields in Hong Kong. "There were powerful voices at the table and valid arguments on both sides and this is a compromise, which means the Chinese banks have to comply by fixed deadlines, but they have a very long window."
GSIBs from developed markets will be required to meet a minimum TLAC requirement of at least 16 per cent of the group's risk-weighted assets from January 2019, and at least 18 per cent from January 2022, while this time frame is 2025 and 2028 respectively for emerging market banks.
Chinese banks raised record levels of capital last year and boast healthy average core equity ratios, but this buffer is under pressure as lending growth outstrips their ability to retain earnings.
"The Chinese banks have won a stay of execution," said a Hong Kong banker who has helped Chinese banks to raise capital. "But they are going to have to become extremely active in the capital markets."