Caixin News November 27th (Reporter Gao Ping): According to the arrangement, Bank of Communications' first phase of Total Loss-Absorbing Capacity (TLAC) non-capital bonds (referred to as 'TLAC non-capital bonds') will start interest today. So far, the five state-owned banks including ICBC, ABC, BOC, CCB, and Bank of Communications have completed the first phase of TLAC non-capital bond issuance this year.

Industry insiders told Caixin reporters that TLAC bond issuance helps strengthen the systemically important status of large banks, supports banks in enhancing risk prevention capabilities, the implementation of TLAC will ensure that large banks have a solid foundation for absorbing losses to serve the real economy, and leverage larger scale credit injections. For bank operations, if TLAC bonds are issued regularly, they can support bank expansion and potentially promote lower liability costs, helping improve the operating capabilities of China's G-SIBs.

Another Bank of Communications 30 billion yuan TLAC non-capital bond starts interest today.

According to the latest announcement from Bank of Communications on the China Money Network regarding the issuance of the first phase of TLAC non-capital bonds in 2024, the bank issued the Bank of Communications' first phase of TLAC non-capital bonds on November 25th. The basic issuance size of this bond is 20 billion yuan, with an additional issuance option of up to 10 billion yuan. The actual total issuance amount is 30 billion yuan, with an interest start date of November 27th, 2024.

Caixin reporters have learned that with Bank of Communications completing the issuance of 30 billion yuan TLAC bonds, the five major state-owned banks have all issued their first phase of TLAC non-capital bonds. Prior to this, ICBC and BOC completed the issuance of Total Loss-Absorbing Capacity non-capital bonds (first phase) in May 2024, with an issuance scale of 40 billion yuan each. CCB and ABC then each issued 50 billion yuan TLAC non-capital bonds in August.

It is understood that Total Loss-Absorbing Capacity (TLAC) is the sum of all eligible instruments that global systemically important banks (G-SIBs) can use to absorb bank losses through write-down or conversion when entering resolution. TLAC non-capital bonds are financial bonds issued by global systemically important banks to meet TLAC requirements, with loss absorption functions, not belonging to commercial bank capital, containing special clauses like subordinated to clearing order, conditional call rights, write-down or conversion, with subordinated attributes weaker than Tier 2 capital bonds and perpetual bonds, but stronger than commercial bonds.

"The issuance of TLAC non-capital bonds is a milestone for China's financial system." Analyst Liu Yakun from Galaxy Securities believes that, on one hand, it can effectively supplement capital for China's global systemically important banks. On the other hand, the issuance of TLAC non-capital bonds will also increase the types and quantity of domestic market credit bond supply. In addition, the issuance of TLAC non-capital bonds helps state-owned banks to meet the international regulatory requirements for TLAC on time.

"The proceeds from this bond issuance, after deducting issuance expenses, will be used based on applicable laws and regulatory approvals to enhance the issuer's overall loss absorption capacity," said Bank of Communications.

There is still significant room for expansion of TLAC non-capital instruments.

According to the "Management Measures for Global Systemically Important Banks' Total Loss-Absorbing Capacity", global systemically important banks must meet the TLAC risk-weighted ratio and TLAC leverage ratio requirements. The four major banks need to meet the first phase requirements by the end of 2024 and the second phase requirements by the end of 2027; Bank of Communications only became a global systemically important bank on November 27, 2023, and must meet the relevant requirements within three years from the date of the designation.

According to brokerage institutions' calculations, if the deposit insurance fund is included up to 2.5%, the pressure on the four major banks to meet the first phase requirements is not significant. However, regarding bank operations, the normalized issuance of TLAC bonds can both support the expansion of banks and potentially reduce the cost of liabilities, helping enhance the operating capacity of China's G-SIBs. The research report released by Ping An Securities in May also shows that, based on calculations, the TLAC shortfall for the five major banks in both the first and second phases is very small.

According to statistics, the four major banks have already completed the issuance of 180 billion yuan in TLAC non-capital bonds, combined with Bank of Communications, totaling 210 billion yuan. An analyst from Citic Securities clearly stated in a research report released in mid-August that, according to calculations, the pressure on China's four major banks to supplement TLAC has significantly eased, and the inclusion of the deposit insurance fund can also help the four major banks meet the assessment criteria. However, in the long term, external support may still be needed.

Everbright Securities' chief financial industry analyst, Wang Yifeng, had previously told Caixin reporters at the beginning of the year that if regulations only allow the TLAC to be calculated based on the balance of deposits insurance funds formed by actual paid premiums, then the TLAC shortfall for the four major banks would be at trillion levels, possibly concentrated in the issuance of TLAC bonds in 2024. In addition, taking into account that by early 2028, the TLAC risk-weighted ratio requirement will increase by 2 percentage points to 18%, it is estimated that there will also be continuous supply of TLAC bonds from 2025 to 2028.

"TLAC non-capital debt instruments are important debt instruments to supplement TLAC, apart from perpetual bonds and Tier 2 capital bonds. The five major banks will face higher assessment requirements in 2028 and 2030, with still significant room for expansion of TLAC non-capital instruments," said an analyst from HTSC.