On November 8, 2013, the China Securities Regulatory Commission (CSRC) and the China Banking Regulatory Commission (CBRC) jointly issued the “Guiding Opinions on Commercial Banks Issuing Corporate Bonds to Replenish Capital” (the “Guiding Opinions” for short), which allows listed and to-be-listed commercial banks to issue corporate bonds at exchanges to replenish capital. The Shanghai Stock Exchange (SSE) has also recently released the “Notice on Commercial Banks Issuing Corporate Bonds to Replenish Capital and the Issues Related to Listing, Trading and Transfer of the Bonds” (the “Notice” for short), which makes specific provisions on listing and trading, transfer, information disclosure, and other issues related to corporate bonds issued by commercial banks for capital replenishment at the SSE. The issuance of the “Guiding Opinions” and the “Notice” symbolizes that channels of commercial banks for capital replenishment have been expanded to the exchange markets, which is of positive significance for promoting the innovation of capital instruments in the banking sector and improving the integration of China’s bond market.
With regard to the international background, after the subprime mortgage crisis, the regulators in the world are paying more and more attention to a series of flaws in the constraint mechanism of bank capital exposed in the crisis, where, for example, bank capital lacked adequate capacity for loss absorption. To this end, the Basel Agreement Ⅲ has set up the hierarchical regulatory requirements for capital adequacy ratio, and established the more stringent eligibility criteria for capital instruments. Since 2012, the CBRC has successively issued the “Measures (Trial) for Capital Management of Commercial Banks” and other policies and regulations to thoroughly usher in the latest international capital regulatory requirements, sorting capital instruments into Core Tier 1 capital instruments, other Tier 1 capital instruments, and Tier 2 capital instruments. Particularly, one of the conditions for eligible Tier 2 capital instruments is the necessity of including the terms of writing down or shares conversion, which shall stipulate that when a trigger event occurs, the instrument can be written down or converted into ordinary shares immediately.
For a long time, there have been few capital replenishment instruments in China's banking sector, only including a small number of products such as ordinary shares and subordinated debts, with the relative lack of other Tier 1 capital instruments and Tier 2 capital instruments. Since January 1, 2013, stock subordinated debts and other supplementary capitals have been rolled back in a pace of 10% every year. In the face of new capital regulatory requirements, China’s banking sector has seen huge pressure on capital replenishment, and commercial banks are in urgent need of promoting the innovation of the capital instruments so as to adapt to the international financial regulatory trend and enhance the capacity for loss absorption; the promotion of the innovation in capital instruments will help optimize the capital structure, strengthen the driving force for the transformational development of China’s banking sector, and improve the international competitiveness of China's banks; moreover, the promotion of the innovation in capital instruments is also conducive to deepening the reform of the financial system and safeguarding the stability of domestic capital market.
Recently, the CBRC will focus on actively promoting the pilot issuance of the Tier 2 capital instruments with write-down terms (the write-down bond for short). The write-down bond is the bank capital that can be used for loss absorption in the case of unsustainable operation, which has the eligibility criteria such as ranking after depositors and general creditors in the order of being compensated, not less than 5 years of original maturity, and the mechanism of triggering write-down to achieve loss absorption under the circumstances of being unable to exist. Currently, a number of banks including state-owned banks, joint-stock banks, and city commercial banks have successively applied to the CBRC for the issuance of write-down bonds.
It is learnt that since last year regulatory authorities and the SSE have jointly promoted the pilot issuance of write-down bonds at the SSE in an active manner. In recent years, the SSE has energetically pushed forward the development of the bond market with the market size significantly expanded. By the end of 2013, the SSE had listed 1,686 bonds, an increase of 65% from the end of 2012; the bond trusteeship volume had reached RMB1.7219 trillion, up by 62 % compared to the end of 2012. The whole year of 2013 saw a total bond transaction of RMB62.6 trillion at the SSE, an increase of 65 % compared to the whole year of 2012, with the number of the listed bonds, the trusteeship volume, and the trading volume hitting historical new highs. In terms of the market structure and the infrastructure, the SSE bond market has the features such as diversified trading mechanisms, efficient repo market, open and transparent information disclosure, and extensive groups of investors.
Based on the above analysis, commercial banks issuing write-down bonds at the SSE is of positive significance in various aspects: first, it will help the banks take advantage of diversified investors of the SSE to further expand the financing channels of the banks, diversify the risks of the banking system, and speed up the innovation of capital instruments; second, it will improve the cooperation between the commercial banks and the SSE and accumulate experience for issuing other capital instruments on the SSE market in the future; third, it will enrich the SSE’s bond products and meet investors’ diverse demands for investment; fourth, it will give full play to the role of the open and transparent pricing mechanism of the SSE and improve China's bond yield curve; fifth, it will deepen the reform of the issuing system of China’s bond market and promote the integration of the bond market.
An SSE official said that according to the “Guiding Opinions”, the commercial banks listed on securities exchanges, or the domestic commercial banks that have issued overseas listed foreign shares, or the commercial banks applying for domestic initial public issuance of shares with their applications still to be approved, may issue write-down bonds at the SSE. After obtaining the confirmation for the attribute of capital instrument and the regulatory opinions of the CBRC, an issuer may choose the public issuance after being approved by the CSRC or the non-public issuance after filing with the SSE. The investors in each phase of non-public-issuance of write-down bonds shall not be more than 200 persons in total. In addition to the specific provisions on arrangements for the listing, trading and transfer of write-down bonds on the SSE, the “Notice” also stipulates the materials, the contents of the prospectus, and the filing procedure as required in the filing with the SSE for the non-public issuance of write-down bonds.
Considering the special risk factors related to the write-down terms, the SSE has affirmed in the “Notice” the corresponding risk control mechanism: First, the requirement for investor suitability management. The investors participating in the subscription for and the trading of publicly issued write-down bonds shall be the professional investors meeting the provisions of the “SSE Interim Measures for Investor Suitability Management of Bond Market”. The investors of the non-publicly-issued write-down bonds shall be the eligible investors stipulated in the “Notice”; Second, the differentiated arrangements of trading mechanisms. Only the write-down bonds publicly issued by the issuers with a total asset of more than RMB5 trillion at the end of the latest period when the bonds are issued may be traded at the SSE in bidding and other modes; Third, strengthening the regulation over the continuous information disclosure for write-down bonds. The “Notice” provides that in addition to fulfilling the obligation of regular information disclosure in accordance with the provisions on corporate bonds and the prospectus, issuers and other obligors for information disclosure shall timely disclose special information including trigger events of Tier 2 capital instruments and other Tier 1 capital instruments, other events having major impacts on capital adequacy ratio, and redemption.
The issuance of the “Notice” has paved a way for the smooth introduction of commercial banks issuing write-down bonds at the SSE in the future. The SSE will continue to step up the service for the market, actively support commercial banks and relevant regulators in propelling the pilot issuance of new-type Tier 2 capital instruments, and jointly contribute to the reform, innovation, prosperity, and development of China’s capital market.