Update: China Plans to Hike Number of Financial Institutions Deemed Too-Big-to-Fail

By | October 10, 2018

Chinese authorities said they will designate more financial institutions as systemically important, a sign that policy makers are stepping up crisis-prevention efforts as the nation’s debt burden and financial risks swell to unprecedented levels.

Financial regulators led by China’s central bank will evaluate candidates from sectors including banking, brokerage and insurance based on their assets, business complexity and how connected they are with others, according to a joint statement on Tuesday [Nov. 27]. [Editor’s note: Bloomberg News updated this article on Nov. 27].

One of two methods to determine the shortlist will be used: regulators will either select at least 30 banks, 10 brokerages and 10 insurers for the systemically important financial institution, or SIFI, label, or they will identify firms that make up at least three-fourths of each sector’s total assets, according to the statement. Designated companies will be subject to extra capital requirements, and may also face rules on leverage, risk exposure and information disclosure.

“We urgently need to have policy guidance to identify, regulate and deal with SIFIs,” the regulators said in the statement.

Increasing the number of SIFIs — a technical description for firms seen as “too big to fail” — may help President Xi Jinping’s government strengthen oversight of China’s $40 trillion financial system. The country’s rapid expansion of lending over the past decade has provided a big jolt to economic growth, but it has also alarmed everyone from bond-rating companies to hedge fund managers and the International Monetary Fund.

“The PBOC is trying to close up the loopholes in the regulatory framework to ensure the oversight is up-to-date with financial activity,” said Tommy Xie, an economist at Oversea-Chinese Banking Corp. in Singapore.

Read more on how China’s too-big-to-fail financial firms keep getting bigger

Other key points from the statement:

  • SIFIs will be divided into groups based on their score and regulated accordingly
  • They will be subject to regular stress tests and additional supervision
  • The evaluation process will be reviewed and adjusted every three years
  • Systemically important financial holding companies will fall under rules

Identifying and regulating SIFIs became a focus for global authorities in the wake of the 2008 crisis, when governments were forced to bail out some of the world’s biggest financial firms.

China’s shadow banking crackdown reduced the riskiness of some of the country’s banks, according to a recent report from Fitch Ratings. China Construction Bank Corp. dropped one level in the Financial Stability Board’s most recent list of globally systemically important institutions, reflecting its lower level of interconnectedness and complexity, according to Fitch.

The People’s Bank of China, the China Banking and Insurance Regulatory Commission and the China Securities Regulatory Commission will draft details on how to evaluate firms and the extra requirements that will be placed on SIFIs, according to today’s statement.

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