China's regulatory clampdown may lower G-SIB scores: Fitch
11/01/2018 15:20
The rise in Chinese banks' global systemically important bank (G-SIB) scores in the previous few years in large part reflects their continued burgeoning size, but increased interbank activity has also raised their interconnectedness, while greater exposure to entrusted investment has added to their complexity, says Fitch Ratings.

The regulatory clampdown on interbank activity and entrusted investments over the last year could see lower G-SIB scores for some Chinese banks in their 2018 assessments, which will incorporate banks' end-2017 data.

G-SIB status obliges banks to meet extra common-equity Tier 1 (CET1) requirements and from 2025 Chinese G-SIBs will also face total loss absorbing capacity requirements, which will increase their total capital requirements to 16 per cent of risk-weighted assets, compared with 11.5 per cent for domestic systemically important banks. Chinese G-SIBs' total capital requirements will then increase further, to 18 per cent, from 2028.

The G-SIB scores of most Chinese banks rose in the 2017 assessments, which were based on end-2016 data and followed Basel III methodology. Two G-SIB banks - China Construction Bank Corporation and Bank of China - moved to capital buffer bucket 2, from bucket 1, and are now subject to a 1.5 per cent CET1 buffer instead of 1 per cent. This followed a similar move for Industrial and Commercial Bank of China in 2016. We expect Bank of Communications to be the next Chinese bank to be designated as a G-SIB, most likely within the next two years.

Aside from a larger size, the rise in interbank activity and entrusted investments drove the latest increase in scores for some mid-tier banks, such as China MinSheng Banking Corporation and Industrial Bank, which are now close to the G-SIB threshold. Mid-tier banks' entrusted investments, for example, expanded at a CAGR of 54 per cent in 2013-2016 and had risen to around 19% of total assets by end-2016, compared with around 1 per cent for state banks.

Regulatory tightening implemented since early 2017 as part of a drive to shrink shadow-banking activity and contain financial risks appears to be reversing these trends. Interbank assets and liabilities, as well as entrusted investments, fell during the first three quarters of 2017, especially for mid-tier banks. The G-SIB scores of banks that have been most active in these areas could therefore fall in the next assessment. Accordingly, we do not expect any mid-tier Chinese banks to be designated as a G-SIB in the medium term. Score calculations also depend on the activity of all 75 banks in the global sample, of which 15 are currently Chinese banks.