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Total Loss-Absorbing Capacity of China’s Global Systematically Important Banks: Performance, Challenges and Policy Options (No.155, 2021)


By Wang Gang, Research Institute of Finance, DRC

Research Report, No.155, 2021 (Total 6220) 2021-6-11

Abstract: The total loss-absorbing capacity (TLAC) is a special regulatory indicator designed by the Financial Stability Board (FSB) targeting at global systematically important banks (G-SIBs), in order to ensure that relevant banks have self-relief capability to address risks with proper management. According to China’s regulatory framework with regard to TLAC, Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China and China Construction Bank will put into effect the TLAC rules in a phased-in manner from the beginning of 2025. Affected by the asset focused mode of deposit-oriented liabilities and credit-oriented assets, and the fact that qualified debt instruments have not yet been issued, China’s G-SIBs are facing the shortage of qualified TLAC instruments. Based on the regulatory experience of developed countries, this paper notes that China needs to refine and implement the regulatory system of TLAC at an early date. Numerator and denominator strategies need to be applied at the same time, stock remodeling and increment issuance combined, and financial markets both at home and abroad managed in an overall fashion. We need to make full use of exemption policy, strive to achieve the standard performance at a reasonable cost on schedule without impacting banks’ function for serving the real economy. Besides, this paper puts forward some policy options for China’s financial supervisory departments and China-funded G-SIBs respectively.

Keywords: globally systematically important banks (G-SIBs), total loss-absorbing capacity, capital instrument innovation, regulatory standard