China’s big four banks face $100b shortfall in loss-absorbing capital

The banks have not yet met their required loss-absorbing capacity levels.

China’s four biggest banks will likely count on the deposit insurance fund to address a multi-billion-dollar shortfall in loss-absorbing capital.

The big four– the Agricultural Bank of China, China Construction Bank, Bank of China, and Industrial and Commercial Bank of China– have not met their targets on total loss-absorbing capacity (TLAC).

The four banks will need about $100b (RMB738b) to meet the target, based on their first half 2024 financials, said S&P Global Ratings credit analyst Michael Huang.

This is a problem as the deadline to the first phase of the TLAC regime edges closer: the four banks will need to accumulate capital equal to 20% of their risk weighted assets by 1 January 2025.

"The banks need capital to fund lending growth, which supports China's economic growth. The Big Four will need to maintain their capital buffers as they continue lending, to be in compliance with the TLAC rules,” said Huang.

This is where the China's Deposit Insurance Fund (DIF) toward their TLAC. The fund could be used to support a bank resolution, if needed, Huang said. 

The TLAC gap will fall to just RMB300b to RMB340b, if each of the four banks count the full amount of the balance in the DIF as part of their TLAC funding.

Huang estimates that the fund is likely to grow to RMB100b to RMB110b by year-end.