China banks face instability on shake-up of funding base
Global regulation ropes in Chinese banks for a capital raise of up to US$400 billion
In the drive to bailout-proof the banking system for taxpayers, global regulators could usher in new instability to China’s banking sector by pushing them to diversify their funding bases, experts say.
The Financial Stability Board, a global banking oversight body hosted by the Bank for International Settlements, issued its final rules this week for Total Loss Absorbing Capacity, or TLAC. The rules have been called the final step in Basel III regulation and will ask the world’s 30 biggest banks to raise substantial capital buffers to protect taxpayers from paying for a failed bank.
Until this week, many industry watchers believed the FSB would initially exclude emerging-market banks from the rules. Instead, that short list of banks, including China’s four biggest lenders, have been given until 2025 to hit the first deadline.
The announcement marks the first time that China has been given a countdown on meeting the requirements. Experts expect that TLAC could force a fundamental shift to the funding base at China’s banks over the next decade, a change that could lead to instability.
“It doesn’t really benefit the system from a financial stability perspective,” said Liao Qiang, senior director of financial institutions at Standard & Poor’s ratings Services in Beijing. “At the end of the day, this is supposed to enhance stability, not take away from it.”
One of the main concerns was the introduction of market sensitivities to the banks’ funding mix.
The structural strength of China’s biggest banks have been their vast deposit franchises, which have provided stable and cheap funding for the lenders.
