On May 11, ICBC announced that it plans to issue ICBC Co., Ltd.'s 2024 Total Loss Absorption Capacity (hereinafter referred to as TLAC) non-capital bonds (Phase I) on May 15, 2024, with a basic issuance scale of RMB 30 billion.
This will be the first TLAC non-capital bond in China. Since January 2024, Industrial and Commercial Bank of China, Bank of China, Agricultural Bank of China, China Construction Bank and Bank of Communications have successively disclosed their plans to issue TLAC non-capital bonds.
Shi Yue, an analyst at the financial business department of Oriental Jincheng, told the reporter of Dahe Finance Cube that in view of the need for industry, agriculture, China and construction to meet the requirements of the TLAC risk-weighted ratio by 2025, and there is a certain gap at present, the above four major banks will have a large demand for TLAC non-capital bond issuance in 2024, and the issuance scale is expected to increase on a large scale.
The first phase of TLAC is imminent
ICBC TLAC non-capital bonds will be issued soon
On May 11, ICBC announced that it plans to issue ICBC Co., Ltd. 2024 Total Loss Absorption Capacity (hereinafter referred to as TLAC) non-capital bonds (Phase I) on May 15, 2024, and the prospectus shows that the basic issuance scale of this bond is 30 billion yuan, of which the basic issuance scale of variety 1 is 20 billion yuan, and the basic issuance scale of variety 2 is 10 billion yuan.
The bookbuilding date for the bonds is 15 May 2024. Among them, the first variety is a 4-year fixed-rate bond, with a conditional issuer's right of redemption at the end of the third year. The issuer has the right to redeem part or all of the bonds at par value subject to satisfying the regulatory requirements. Variety 2 is a 6-year fixed-rate bond with a conditional issuer's right of redemption at the end of the 5th year. If the issuance of this bond is completed, it will be the first TLAC non-capital bond in China.
What is TLAC?
Total loss absorption capacity, abbreviated as TLAC, refers to the sum of the capital and debt instruments that global systemically important banks (hereinafter referred to as G-SIBs) can absorb losses through write-downs or conversion into common shares when they enter the resolution stage. The aim is to require global systemically important banks to have sufficient loss-absorbing capacity of their own to avoid the use of large amounts of public resources in extreme situations that require government bailouts.
In 2015, the Financial Stability Board (FSB) formally proposed TLAC to further enhance the loss-absorbing capacity of G-SIBs, requiring G-SIBs to have additional loss-absorbing capacity in addition to meeting minimum regulatory capital requirements to ensure that they can absorb losses through debt instruments in extreme cases. The eligible capital in the TLAC requirements includes not only core Tier 1 capital, other Tier 1 capital and Tier 2 capital, but also non-capital debt supplemental instruments established specifically for TLAC. In addition, the two core regulatory indicators of TLAC, the TLAC risk-weighted ratio and the leverage ratio, require G-SIBs to be no less than 16% and 6% respectively from 1 January 2019 and 18% and 6.75% respectively from 1 January 2022.
China, as the only emerging market economy, has a six-year delay period, and mainland G-SIBs need to meet the first phase of regulatory requirements by 2025 and the second phase from 2028.
As of the end of 2023, a total of five banks in mainland China have been included in the G-SIBs list, among which Industrial and Commercial Bank of China and Bank of China are in the second tier, Agricultural Bank of China and China Construction Bank have been upgraded from the previous first tier to the second tier, and Bank of Communications is in the first tier.
This also means that as G-SIBs of emerging market economies, ICBC, Agricultural Bank of China, Bank of China, and China Construction Bank need to achieve the first phase of TLAC supervision in early 2025, and Bank of Communications (which will be selected for the first time in 2023) needs to achieve the first phase of TLAC compliance in early 2027.
With reference to international regulatory standards, China has also introduced and implemented TLAC regulatory rules. In 2021, the People's Bank of China, the China Banking and Insurance Regulatory Commission (CBIRC) and the Ministry of Finance (MOF) jointly issued the Measures for the Management of the Total Loss-Absorbing Capacity of Global Systemically Important Banks, marking the official implementation of the "Chinese version" of the TLAC regulatory rules. In April 2022, the People's Bank of China (PBoC) and the China Banking and Insurance Regulatory Commission (CBIRC) jointly issued the Notice on Matters Concerning the Issuance of Non-Capital Bonds with Total Loss-Absorbing Capacity by Global Systemically Important Banks, which clarified the core elements and issuance management regulations of TLAC non-capital bonds, and provided a basis for global systemically important banks to organize their issuance in an orderly manner.
The issuance amount is less than the estimated figure
It is expected that the pressure on the big four banks to meet the standard by the beginning of 2025 is relatively small
Since the beginning of 2024, four major state-owned banks have successively disclosed their plans to issue non-capital bonds of TLAC in the face of the time requirement to achieve the first phase of TLAC supervision in early 2025. According to the announcement issued by the four major banks, in 2024, Industrial and Commercial Bank of China, Bank of China, Agricultural Bank of China, and China Construction Bank plan to issue TLAC bonds with a quota of no more than 60 billion yuan, no more than 150 billion yuan, no more than 50 billion yuan, and no more than 50 billion yuan, with a total of no more than 310 billion yuan.
A few days ago, CSI Pengyuan analysts analyzed at a roundtable forum with the theme of "Overseas Issuance of TLAC Non-capital Bonds, Practical Preparation for Domestic Issuance and Credit Rating Discussion" that the domestic TLAC regulatory rules are also two core regulatory indicators: TLAC leverage ratio and TLAC risk-weighted ratio. The denominator of the TLAC risk-weighted ratio and the capital adequacy ratio are both risk-weighted assets, but the numerator varies, and the net capital of the capital adequacy ratio is the minimum capital requirement under Basel III, as well as reserve capital and additional capital; Total loss-absorbing capacity is calculated to exclude reserve capital and additional capital, but can be included in TLAC non-capital bonds and deposit insurance payments.
Among them, when the TLAC risk-weighted ratio is 16% and 18%, the upper limit of deposit insurance can be included is 2.5% and 3.5% of risk-weighted assets respectively, but the current implementation time of the domestic deposit insurance system is still relatively short, and the cumulative scale is relatively small, and the effect of helping TLAC to meet the standard is limited at the level of 10 billion.
"The TLAC compliance gap of domestic G-SIBs mainly comes from the TLAC risk-weighted ratio, and under the static scenario, we estimate that the total TLAC gap of the four major banks is about 1.5 trillion yuan, and if we consider the continuous consumption of capital by business development, the scale of this gap should be even larger. In the future, TLAC non-capital bonds will become an important TLAC supplemental instrument. CSI Pengyuan said.
Shi Yue said that according to the data of the 2023 annual report announced, the TLAC risk-weighted ratios of the four G-SIBs in industry, agriculture, China and construction are 15.10%, 13.14%, 13.74% and 13.95% respectively, and the gaps in the risk-weighted ratios of TLAC are 0.90%, 2.86%, 2.26% and 2.05% respectively.
Niu Kai and Jiang Nan of the Financial Market Department of the Bank of China Shanghai Headquarters recently wrote an article pointing out that as of the end of 2023, the capital adequacy ratio of large commercial banks was 17.56%, which was at a high level, while the market estimated that the funding gap based on the data of listed banks in the third quarter of 2023 exceeded 1 trillion yuan, and the final announcement of the issuance amount was less than the estimated data, indicating that the pressure on the four major banks to meet the standard before January 2025 was relatively small. In addition, according to the TLAC regulations, the mainland will include the deposit insurance fund in the TLAC assessment of systemically important banks, although its stock is small, but it will still reduce the pressure on TLAC replenishment to a certain extent.
It is proposed to streamline the approval process for TLAC non-capital bonds
Increase the willingness of institutions to hold bonds
According to Bloomberg statistics, from 2021 to 2023, the total number of TLAC eligible instruments issued by global G-SIBs in the U.S. market will be 2,195, with a total issuance size of US$946.718 billion. According to the Basel III classification, other Tier 1 capital instruments (Tier 1) accounted for 7.24%, Tier 2 capital instruments (Tier 2) accounted for 5.65%, and TLAC non-capital debt instruments accounted for 87.11%. In terms of the proportion of issuances, the issuance of non-capital debt instruments of TLAC accounts for as much as 95%.
According to a relevant person from CSI Pengyuan, this set of data shows that TLAC non-capital debt instruments have become the main issuance of overseas G-SIBs.
According to the statistics of CSI Pengyuan, from the perspective of the issuance characteristics of TLAC non-capital debt instruments, the maturity is mainly medium and long-term, and from the sample data statistics, the number of bonds with a maturity of 3-5 years (inclusive), 5-10 years (inclusive) and more than 10 years accounted for 34.77%, 26.70% and 13.87% respectively. From the perspective of holder structure, taking the US market as an example, among all TLAC non-capital debt instruments issued from 2021 to 2023, the holdings of broad funds (investment advisers), banks and insurance companies accounted for 83.20%, 6.97% and 4.33% respectively, and non-bank institutions are the most important investment institutions in TLAC non-capital debt instruments.
"From the perspective of international experience, regulators in some countries require broad funds to invest a certain proportion of funds in debt instruments with a certain loss-absorbing capacity to reduce the impact of financial institution bankruptcy on the financial system, such as the United States, Canada, etc., and at the same time will limit the investment proportion of bank institutional investors or require higher risk capital occupation, which is intended to avoid systemic risk transmission." A relevant person from CSI Pengyuan said.
Shi Yue said that at present, industry, agriculture, China, construction, and communications have each disclosed their 2024 TLAC non-capital bond issuance plans, in view of the need for industry, agriculture, China, and construction to meet the TLAC risk-weighted ratio requirements by 2025, and there is a certain gap at present, the above four major banks in 2024 have a larger demand for TLAC non-capital bond issuance, and the issuance scale is expected to increase on a large scale.
For the subsequent issuance of TLAC non-capital bonds, Shi Yue said that it is recommended to simplify the bond approval process and provide liquidity guarantee tools to increase the willingness of institutions to hold bonds. In addition, it is recommended to appropriately adjust the terms of bonds according to the characteristics and needs of different banks and implement differentiated management.
Trainee Editor: Li Wenyu | Reviewer: Zhang Yipeng | Review: Li Zhen | Supervisor: Wan Junwei