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    CBIRC Revises Guidance on Capital Instrument Innovation of Banks

    November 29, 2019

    CBIRC revised guidance on the "Capital Instrument Innovation" of commercial banks, with immediate effect. The revised guidance covers the basic principles for commercial banks to issue capital instruments, the criteria for determining qualified capital instruments, and the working mechanism for commercial banks to issue capital instruments. One of the revisions concerns further clarification regarding the sequence of loss absorption of various capital instruments. The amendments are in line with Basel III and the international practices.

    The former China Banking Regulatory Commission (CBRC) issued, in 2012, the "Measures for the Capital Management of Commercial Banks (for Trial Implementation)" and the "Guiding Opinions on the Innovation of Capital Tools of Commercial Banks" (the former "Guiding Opinions" ) to issue capital for commercial banks in China. Since then, commercial banks have successively introduced new capital instruments such as secondary capital bonds, preferred stocks, and non-fixed-term capital bonds (that is, perpetual bonds). With the increasing variety of capital instruments, the identification criteria for qualified capital instruments specified in the original Guiding Opinions need to be adjusted and refined. Earlier this year, the Ministry of Finance issued supporting rules such as the “Provisions on Perpetual Debt-related Accounting Treatment,” which also laid an important policy foundation for this revision. CBIRC has revised this guidance in response to these changes and also published the questions and answers (Q&A) to help understand the revisions. 

    The amendments to the guidance are to:

    • Adjust capital instruments trigger event name to more accurately reflect the meaning of the triggering event
    • Adjust the other tier 1 capital trigger conditions and set a different trigger events to other tier 1 capital in accordance with the accounting classification
    • Specify the order of loss absorption of capital instruments (All capital instruments of the same level should absorb losses at the same time and capital instruments of different levels should absorb losses in sequence.)
    • Specify that write-downs should be permanent write-downs
    • Clarify the relevant requirements for the issuance of capital instruments by commercial banks, including attracting diversified market participants to participate in investment through market-based pricing and ensuring the orderly connection of issuance and redemption of capital instruments

     

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    Keywords: Asia Pacific, China, Banking, Regulatory Capital, Tier 1 Capital, Loss Absorbing Capacity, Basel III, CBIRC

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