Recently, the People’s Bank of China (PBC) and China Banking and Insurance Regulatory Commission (CBIRC) officially set out to solicit public opinions on the Evaluation Measures for Systemically Important Banks (Exposure Draft) (hereinafter referred to as the Evaluation Measures). Officials from the PBC and the CBIRC answered questions from the press on the Evaluation Measures.

I. What is the background of formulating the Evaluation Measures?

Since the 2008 international financial crisis, improving the macroprudential policy framework has gradually become a vital task of financial regulatory system reform. Specifically, one of the top priorities of enhancing macroprudential management and maintaining financial stability is to strengthen the central bank’s regulation over systemically important financial institutions (SIFIs). In line with the decisions and arrangements of the CPC Central Committee and the State Council, the PBC, the CBIRC and China Securities Regulatory Commission (CSRC) jointly released the Guidelines on Improving Regulation of Systemically Important Financial Institutions (Yinfa No. 301 [2018], hereinafter referred to as the Guidelines) on November 27, 2018, which has set overall institutional arrangements for the identification, regulation and resolution of SIFIs in China. In February 2019, the General Office of the CPC Central Committee and the General Office of the State Council jointly issued Provisions on the Functions, Organizational Structure and Staffing of the People’s Bank of China, which stipulated that the Macroprudential Policy Bureau shall be set up within the PBC to take the lead in formulating basic rules, monitoring, analysis, and consolidated supervision of SIFIs, and institute assessment, identification and resolution mechanisms for SIFIs.

In order to fulfill the responsibility of macroprudential management entrusted by the CPC Central Committee and the State Council, the PBC led the formulation of implementation rules of the Guidelines. Currently, the total assets of China’s financial sector amount to RMB300 trillion, and those of the banking sector add up to RMB268 trillion, or 89% of the total. Given the important role of the banking sector in China’s financial system, where the Industrial and Commercial Bank of China (ICBC), Agricultural Bank of China (ABC), Bank of China (BOC), and China Construction Bank (CCB) have all been included in the list of global systemically important banks (G-SIBs), and the fact that international organizations and major economies have already accumulated much experience in SIB evaluation and regulation, the PBC started by developing evaluation measures for domestic systemically important banks (D-SIBs) with CBIRC, and then moved on to drawing up additional regulatory provisions, well paving the way for formulating implementation rules for systemically important insurers and securities institutions.

II. How to evaluate the systemic importance of China’s banks?

The procedures and approaches to the evaluation of China’s SIBs are fully discussed in the Evaluation Measures. Apart from referring to evaluation measures for G-SIBs and A Framework for Dealing with Domestic Systemically Important Banks (2012) issued by Basel Committee on Banking Supervision, the PBC and the CBIRC also adjusted evaluation indicators based on China’s realities. In the next step, the two authorities will send data submission templates and data reporting instructions to 30 eligible banks under review, collect data of 2018, and conduct 2019 SIB evaluation. To begin with, scores indicating the systemic importance of the 30 banks will be calculated with quantitative assessment indicators. Tier-one assessment indicators include size, interconnectedness, substitutability and complexity, each of which carries a weight of 25%. Every tier-one indicator is comprised of several tier-two indicators. Banks whose scores are above a certain threshold will be included in an initial list of SIBs. Next, by taking into consideration other quantitative and qualitative information, a supervisory judgement will be made on the systemic importance of the banks. The final list of SIBs will be jointly released by the PBC and the CBIRC upon recognition of the Financial Stability and Development Committee (FSDC) under the State Council.

III. What regulatory measures will be taken for banks identified as SIBs?

In recent years, the CBIRC has developed and practiced a series of regulatory requirements for capital and leverage ratios, risk management, corporate governance, information disclosure and stress tests in the banking sector in reference to international standards like the Basel Accords also with national conditions considered. The CBIRC will carry on with the routine supervision on SIBs according to the division of labour under the Guidelines. For reinforcing macroprudential management and guarding against systemic risks, and based on the development and regulation practices regarding China’s banking sector, the PBC will lead the formulation of additional regulatory rules for SIBs. It will start with the implementation of additional capital requirements and inherent capital constraint mechanisms, strengthen regulatory requirements for liquidity, large exposures, risk data aggregation and risk reports, and also propose management requirements for the development of recovery and resolution plans and the conduction of resolvability assessments, so as to ensure earnest enhancement of operation stability of SIBs. At the same time, the PBC will press ahead with the monitoring and analysis of SIBs and stress tests, and put forward relevant additional regulatory requirements as needed.

IV. How will the Evaluation Measures influence China’s financial system?

Large in size, China’s SIBs are beacons of the financial market. Identifying them and strengthening regulation will help improve the transmission mechanism of monetary policy, promote fair and orderly market competition, improve the stability of China’s banking system, as well as prevent and mitigate systemic financial risks. The Evaluation Measures, consistent with requirements of the Guidelines, sets out basic rules for SIB evaluation in China, represents a significant step taken to strengthen macroprudential management and guard against “too-big-to-fail” risks challenging Chinese SIBs, and also critical institutional arrangements for the prevention and mitigation of major financial risks. It will help us identify banks exerting systemic influence on China’s financial system, boost the transparency and feasibility of the recognition of Chinese SIBs, and contribute to the sound operation of these banks.