Bank of China Takes Pioneering Step to Raise $21 Billion in Loss-Absorbing Bonds

In a groundbreaking move, Bank of China has revealed plans to issue up to 150 billion yuan (approximately US$21 billion) in loss-absorbing bonds, making it the first major state bank in China to address a significant funding shortfall ahead of the 2025 deadline for meeting global capital requirements. The bank intends to tap both domestic and overseas debt markets to issue a new category of total loss-absorbing capacity (TLAC) bonds, as detailed in a filing with the Shanghai Stock Exchange on Friday.

China's banking regulator, in 2022, granted approval for major state-owned banks to issue such bonds, aiming to enhance stability within the nation's financial system. These bonds, excluded from a bank's capital base, can be either written off or converted into common equities during the disposal phase of the bank. The move aligns with the regulatory framework to ensure major state-owned banks, including Industrial and Commercial Bank of China, Agricultural Bank of China, China Construction Bank, and Bank of Communications, meet the TLAC requirements.

Global systemically important banks, designated by both Chinese regulators and the Financial Stability Board, are mandated to maintain a TLAC amounting to at least 16% of risk-weighted assets starting January 1, 2025. This requirement will be further elevated to 18% from January 1, 2028. Fitch Ratings highlighted the capital-raising pressure on Chinese lenders, especially as they navigate challenges in supporting the Chinese economy, property developers, and local government financing vehicles.

The Bank of China's proactive approach to issue loss-absorbing bonds underscores the strategic measures banks are taking to meet stringent global capital standards. The move is expected to set a precedent, prompting other lenders to unveil similar plans to address capital shortfalls and align with evolving regulatory requirements. Fitch estimates that the top five Chinese banks may collectively issue an additional 1.7 trillion yuan in debt by 2025 and 6.3 trillion yuan by 2028 to fulfill the TLAC requirements. As the financial landscape adapts to these regulatory changes, the industry anticipates further announcements from major players in the Chinese banking sector.

By fLEXI tEAM