China’s biggest banks issue first loss-absorbing debt

China’s leading banks have taken a significant step towards meeting international financial regulations by issuing their first-ever loss-absorbing bonds, the Financial Times reported on Thursday.

This move aims to prevent a repeat of the 2008 financial crisis by ensuring banks have a buffer to absorb losses before impacting depositors.

Industrial and Commercial Bank of China (ICBC) kicked off the process by selling 40 billion-yuan ($5.5 billion) of these total loss-absorbing capacity (TLAC) bonds this week.

Bank of China followed suit, announcing pricing for its own 30 billion-yuan TLAC bond issuance on Thursday.

These bonds are a key requirement by the Financial Stability Board (FSB), an international regulatory body, for globally important banks.

China has five banks designated as globally systemically important by the FSB, necessitating them to hold a specific amount of TLAC by 2025.

TLAC bonds differ from existing capital instruments like additional tier 1 (AT1) debt. They absorb losses ahead of other liabilities, protecting depositors and promoting financial stability.

Fitch Ratings estimates that China’s five major banks will need to issue around 1.6 trillion yuan in TLAC and other capital instruments by 2025. This figure could be reduced if Chinese regulators allow deposit insurance funds to contribute towards the requirement.

The issuance of TLAC bonds comes amidst ongoing concerns about China’s economic slowdown, particularly in the property sector. This move highlights China’s efforts to strengthen its financial system and comply with international regulations designed to prevent future financial crises.