On October 29, 2021, the People's Bank of China issued the Measures for the Administration of the Total Loss Absorption Capacity of Global Systemically Important Banks (Order [2021] No. 6 of the People's Bank of China), which formally clarified the total loss absorption capacity (TLAC) requirements for Global Systemically Important Banks (G-SIBs) in China.
Previously, since 2016, we have been paying attention to and studying the framework content and international experience of TLAC rules, tracking the implementation of TLAC requirements in China, and publishing a number of research reports.
The collection is hereby collated for the benefit of the reader.
The Deposit Insurance Fund will be included in the TLAC-Assessment G-SIBs Total Loss Absorption Capacity (TLAC) Requirement Management Measures
On 29 October 2021, the People's Bank of China, the China Banking and Insurance Regulatory Commission (CBIRC) and the Ministry of Finance issued the Measures for the Administration of the Total Loss Absorption Capacity of Global Systemically Important Banks (Order [2021] No. 6 of the People's Bank of China, hereinafter referred to as the "Administrative Measures"). With the official promulgation of the Measures for the Management of the Total Loss Absorption Capacity of Global Systemically Important Banks, the regulatory framework for systemically important banks has been fully constructed.
In the aftermath of the 2008 international financial crisis, international regulatory organizations such as the Financial Stability Board (FSB) set up a systemically important banking regulatory framework to guard against the "too big" risk of large financial institutions, including the total loss absorption capacity (TLAC) requirement for global systemically important banks (G-SIBs).
The Administrative Measures draw on Japan's TLAC rules to allow G-SIBs to fully include the deposit insurance fund in TLAC, which will greatly alleviate the pressure on China's G-SIBs to meet TLAC requirements. Previously, in the TLAC Rules developed by the Financial Stability Board, it was stated that "credible ex ante committed funds that contribute to the orderly disposition of G-SIBs to help them recapitalize (which must be prepaid by industry bodies) may be considered in the total loss-absorbing capacity of financial institutions." "In practice, the Japan Financial Services Agency has included deposit insurance in the feasible advance commitment funds under this clause, thus reducing the pressure on Japanese G-SIBs to implement TLAC." Compared with the Draft for Comments, the Administrative Measures amend the corresponding formulation to further clarify that the deposit insurance fund that G-SIBs can be included in TLAC is not limited to the premium share paid by the institution itself, but the total amount of all deposit insurance funds managed by the deposit insurance fund. According to our calculations, this provision may alleviate the gap between the capital situation of China's G-SIBs and the requirements of TLAC by 20% to 40%.
However, in the next three years, G-SIBs will still need to issue capital instruments and TLAC instruments to fully meet TLAC requirements. With reference to the Administrative Measures, the salient features of future TLAC instruments will include "investors are not entitled to early redemption", "must contain clauses for write-downs or conversion into common shares", "the remaining period is more than one year", and the characteristics of the order of repayment after the bank's ordinary claims and before the bank's other capital instruments. Previously, in March 2018, we published our report", "Where to Find New Qualified Capital Instruments and TLAC Tools: A Comparative Research-Based Perspective", which explored the possibilities for innovation in future TLAC tools.
(Author: Chen Hao, Political Commissar Lu)
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The framework of total loss absorption capacity (TLAC) and its contents
In November 2015, the G20 promulgated the Principles on the Ability of Global Systemically Important Banks to Absorb Losses and Recapitalize in Disposal, which agreed on specific TLAC criteria for total loss absorption capacity, which will be formally implemented on 1 January 2019. Given its possible impact on the capital adequacy ratios of global systemically important banks, this report sorts out their framework and content.
Total Loss Absorption Capacity (TLAC) mainly refers to the sum of various types of capital or debt instruments that global systemically important banks (G-SIBs) can absorb bank losses by write-downs or equity conversions when entering the disposal process, which is mainly measured and calculated by risk-weighted assets and minimum leverage.
The framework and content of TLAC mainly include: First, the TLAC rules mainly apply to each disposal entity of G-SIBs (including parent companies, subsidiaries, direct or indirect holding companies); Second, it clarifies the criteria for defining the financial group TLAC and its important subsidiaries; Third, the quantitative standard of TLAC is mainly measured by the minimum TLAC requirement and the minimum leverage; Fourth, there is both overlap and difference between TLAC and Basel Accords; Fifth, the requirements for qualifying debt instruments and the types of debt instruments that cannot be used as TLAC are clarified.
The impact of TLAC is mainly manifested in: first, TLAC has greatly improved the loss absorption capacity requirements of G-SIBs, which is conducive to alleviating the problem of "too big to fail"; secondly, it has further increased the funding gap of G-SIBs, indirectly promoting the issuance of TLAC debt instruments.
(Author: Commissar Lu)
Where to Find New Qualified Capital Instruments and TLAC Tools: Based on the Perspective of Comparative Research
On March 12, the First Bank, Three Associations and SAFE issued the Opinions on Further Supporting the Innovation of Capital Instruments of Commercial Banks, requiring active support for the beneficial exploration of capital instrument innovation of commercial banks, increasing the types of capital instruments and expanding the scope of investment entities.
This paper reviews the regulatory requirements for qualified capital instruments and total loss absorption capacity (TLAC) instruments in international and domestic regulations, and compares the differences in capital measurement and accounting classification of preferred stocks, write-down tier 2 capital bonds, convertible tier 2 capital bonds and convertible bonds.
This article explores the future direction of innovative capital instruments, as well as the current problems in the issuance and investment of capital instruments.
(Author: He Fan, Political Commissar Lu)
Filling the Gap in Qualified TLAC Debt Instruments – A Brief Review of perpetual Bond Issuance by the Financial Commission
On December 25, the Office of the Financial Commission held a special meeting to study issues related to multi-channel support for commercial banks to replenish capital, and to promote the launch of perpetual bond issuance as soon as possible.
At present, the four major banks lack qualified TLAC debt instruments, and there are difficulties in issuing other Tier 1 capital instruments by small and medium-sized banks, and perpetual bonds are expected to fill the above gaps.
Commercial bank perpetual bonds are different from ordinary corporate perpetual bonds, with mandatory write-down or equity conversion clauses, and at the same time, there are differences in the order of repayment and dividends according to the difference in the level of their supplementary capital or TLAC.
There is a problem of capital occupation in the capital instruments and TLAC instruments of commercial banks investing in other banks, and it is recommended to further expand the scope of investors in the capital instruments of commercial banks.
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The content of this report is only a macroeconomic analysis, does not include investment rating or valuation analysis of securities and securities-related products, is not a securities report, and does not constitute a recommendation to investors.