On November 1, the State Administration of Financial Supervision promulgated the “Measures on Capital Management of Commercial Banks”, which will be officially implemented from January 1, 2024.
The Zhitong Finance app learned that CICC released a research report saying that on November 1, the State Administration of Financial Supervision announced the “Measures on Capital Management of Commercial Banks”, which will be officially implemented on January 1, 2024. The release of this official draft is in line with market expectations. Compared with the draft for solicitation of comments, the official draft imposes more capital restrictions on banks that account for a relatively high share of mortgage loans, has less impact on letter of credit business, and is also expected to reduce capital consumption for banks investing in public funds. The bank believes that the new capital regulations are generally conducive to saving bank capital. In particular, they are expected to ease capital pressure on large state-owned banks and commercial banks in leading cities with rapid asset growth.The main views of CICC are as follows:
On November 1, the State Administration of Financial Supervision promulgated the “Measures on Capital Management of Commercial Banks” (hereinafter referred to as the “Official Draft”), which will be officially implemented on January 1, 2024.
On February 18 of this year, the former Banking Insurance Regulatory Commission issued the “Commercial Bank Capital Management Measures (Draft for Comments)” (hereinafter referred to as the “Draft for Comments”). The publication of this official draft was in line with market expectations. Overall, there was little change from the draft solicitation of comments (see our previous report “Interpretation of the Draft for Comments on the Capital Management Measures of Commercial Banks” ). Compared to the draft for solicitation of comments, the official draft imposes more capital restrictions on banks that account for a relatively high share of mortgage loans, and the impact on the letter of credit business is reduced. We believe that it is also expected that banks will also reduce capital consumption when investing in public funds. Specifically, the main changes in the official draft compared to the draft for solicitation of comments include:
1. The asset weight of some assets and credit risk has been adjusted:
Overall reduction in the credit risk weight of mortgage loans:According to the draft for solicitation of comments, if residential real estate meets prudential requirements such as completed construction, first-tier banks can set weights of 40% to 105% according to categories such as sources of repayment, LTV (loan value ratio), etc.; the official draft refines the classification rules on this basis, and the overall adjustment ranges from 20% to 105%. Currently, China's LTV is about 60%, and the corresponding mortgage risk weight is about 20% to 30%. The overall mortgage weight has been lowered; second-tier banks are still 50% unchanged. Create more capital savings for tier 1 banks with a relatively high share of mortgages.
Lower the credit risk weight of subordinated debt under policy:According to the draft for solicitation of comments, the risk weight of commercial banks for subordinated claims and TLAC is 150%, and the subprime debt of development financial institutions and policy banks was lowered to 100% in the official draft.
Lower the credit risk weight of commercial banks' equity investments:In the official draft, the risk weight of commercial banks for equity investment in industrial and commercial enterprises was lowered from 400% to 250% regardless of special circumstances such as whether debt-for-equity swaps were listed or held for policy reasons.
Adjust the credit conversion factors applicable to some off-balance sheet businessesFor short-term projects directly related to trade, the credit conversion factor is 20%. The credit conversion factor for domestic letters of credit based on trade in services has been lowered from 100% of the draft for comments to 50%. Compared with the draft for comments, the impact of the new regulations on the letter of credit business has been significantly reduced.
2. Clarify the transition period arrangements: The new capital regulations will be implemented on January 1, 2024. The official draft adds a transition period for loss included in net capital and bank information disclosure:
Excess loss preparations of commercial banks can be included in secondary capital. Excess loss preparations under the weighting method/internal assessment method must not exceed 1.25%/0.6% of credit risk-weighted assets. This official draft requires the establishment of a two-year transition period to prepare for losses included in net capital, during which time the minimum requirements for preparing for losses of non-credit assets are gradually raised. We believe that the purpose of this transition period is to be consistent with the transition period of the “Commercial Bank Financial Asset Risk Classification Measures” that began to be implemented in July this year (before December 31, 2025).
A five-year transition period is set for commercial bank information disclosure. During the transition period, banks apply different information disclosure requirements according to their grade, system importance, and listing conditions to reduce the pressure on banks to disclose.
3. In terms of the credit risk weight of asset management products,The official draft expands the scope of “independent third parties” that can confirm the basic asset information of asset management products, making it clear that “independent third parties” include asset management product managers under certain circumstances. The specific situation indicates that asset management products invested by commercial banks are public funds. We think this means that a penetrating list of bank investment in public offerings can be provided by public funds. Compared with the previous draft for comments, the official version of the penetrating law is expected to result in some capital savings for banks investing in public funds, although the overall risk weight of the commodity base may still increase from about 25% to about 40% after the new regulations (due to the increase in the weight of assets such as interbank claims).
It is expected that the implementation of the new capital regulations will lead to certain capital savings。 We have estimated the capital saving effects of the new capital regulations. Among them: 1) For most listed banks using the weighting method (first-tier banks), we estimate that the new regulations can increase the core tier 1 capital adequacy ratio by 35 bps. Among them, China's major banks/stock banks/first-tier regional banks have a positive contribution of 21bp/62bp/35bp. The proportion of loans to mortgages, credit cards, and high-quality enterprise customers is higher, and the capital saving effect is greater; 2) For the top five banks and CMB that use internal assessments, if the bottom of the capital line is lowered (7 to 80%) 2.5%) Turn all In order to save capital, we estimate that the core Tier 1 capital adequacy ratio can be increased by an additional 1ppt.
Implications for banks:We believe that the new capital regulations as a whole are conducive to saving bank capital. In particular, they are expected to ease capital pressure on large state-owned banks and commercial banks in leading cities with rapid asset growth rates. Furthermore, the new regulations reflect new regulatory guidelines against the latest international regulatory rules, including reducing the capital costs of banks' investment in mortgages, high-quality enterprises, small and medium-sized enterprises, local government general bonds, credit cards, etc., and increasing the capital costs of banks' investment in development loans, interbank bonds, and subordinated bonds, etc., which may have an impact on the asset allocation behavior of commercial banks.
The capital savings effect fell short of expectations.