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China is likely to list at least 10 out of 30 institutions as domestic systemically important banks (D-SIBs) Fitch ratings estimates and based on the regulator's draft consultations and could influence views over systemic importance for some banks.

China Big Four Banks

Fitch said the move may have an impact on their assessment of the banks Support Ratings (SRs). More stringent capital requirements, if any, beyond the existing 1% D-SIB surcharge, may result in more capital issuance by the D-SIBs over the next few years.

Regulatory D-SIB designations will be one factor in forming Fitch's view on a bank's systemic importance and likelihood of receiving sovereign support. We also take into account other important areas such as ownership, history of state support, as well as a bank's policy or quasi-policy roles and functions, in our assessment of SRs and Support Rating Floors (SRFs). Typical SRFs for D-SIBs would be 1-2 notches below the sovereign rating for sovereign ratings that are in the 'A' category, such as China (A+/Stable).

However, the sovereign's ability to provide support to a large number of D-SIBs may be constrained by the size of the banking system in the event of systemic stress.

China Bank CAR

Fitch analysis suggests that at least 10 commercial banks will be included on the D-SIB list.

  • The 'big four' are likely to fall under Bucket 3 (there are four buckets in total, with Bucket 4 being the most systemically important), while Bank of Communications (BOCOM) is likely to fall into Bucket 2.
  • The "big four" state-owned commercial banks are the Bank of China, the China Construction Bank, the Industrial and Commercial Bank of China, and the Agricultural Bank of China, all of which are among the largest banks in the world as of 2018.

These banks have SRs of '1'. The 'big four' are already designated as global systemically important banks (G-SIBs), and have capital surcharges of 1% to 1.5% based on the latest G-SIB list as of November 2019. Fitch expects BOCOM is also likely to become a G-SIB over the next year or two, given the steady increase in its size.

There are five mid-tier banks that Fitch estimate will be listed as D-SIBs:

  1. Industrial Bank,
  2. China Merchants Bank,
  3. Shanghai Pudong Development Bank,
  4. China CITIC Bank, and
  5. China Minsheng Banking Corporation (CMBC).

These already have SRs of '2', except CMBC. Fitch may reassess their relative SRs and SRFs based on the final D-SIB list, especially for CMBC which is the only bank that they expect to be named as a D-SIB to which is currently assign a SR of '3'. Non D-SIB banks may still receive varying levels of state support, but Fitch would generally expect their SRs to be lower than D-SIBs unless there is a previous support record and/or more explicit statements from the authorities over the propensity to support individual banks.

China Bnaking System BIS

The lack of detailed disclosure and possibility of further regulatory fine-tuning mean that the final list and bucket designations could diverge from our estimates. Moreover, it is hard to estimate the D-SIB score for the Postal Savings Bank of China and China Development Bank, due to a shortage of detailed information.

However, Fitch'sassessment of their systemic importance currently takes into account their policy and quasi-policy roles. It is unclear if the authorities will introduce different capital surcharges for D-SIBs beyond the 1% core capital surcharge for D-SIBs currently in place, based on the bucket into which they fall Fitch said.

Such a change could lead to more stringent regulatory requirements for D-SIBs, and may be credit-positive for their Viability Ratings if they can sustain higher loss-absorption buffers. This would be in line with the government's overarching agenda of broadening and strengthening regulatory supervision across the financial sector.

Source: Fitch Ratings

From The TradersCommunity Research Desk

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