The amount of debt held by commercial banks is nearly 70 trillion! How does the new capital management approach affect the bond market

　　China Banking and Insurance Regulatory Commission and the Central Bank recently publicly solicited opinions on the Measures for Capital Management of Commercial Banks (Draft for Comment). The new regulation is to implement the regulatory requirements of Basel III issued by the Basel Committee in 2017, with the goal of improving the risk management level of banks. The measures are planned to be formally implemented on January 1, 2024.

　　The impact of this new regulation on the bond market is not small. The data shows that commercial banks hold 69.1 trillion yuan of bonds, accounting for 55.30% of the scale of custody bonds, and are the largest institutions holding bonds in China. According to the reporter’s interview with people in the industry, on the whole, the new regulations adjust the bond risk weight coefficient, which is beneficial to commercial banks to reduce capital consumption, and generally benefits local government general bonds, investment-grade credit bonds, bad bank secondary capital bonds, and interbank deposit certificates of more than three months.

　　The willingness to hold local bonds and high-quality credit bonds may rise.

　　Wang Qiangsong, head of the financial research department of Nanyin, told CBN that the new regulations have the greatest impact on the bond market from several dimensions. First of all, the risk weight of local governments’ general bonds is lowered from 20% to 10%, and special bonds remain unchanged. The general bond revenue and expenditure of local governments are included in the general budget revenue and expenditure. Legally speaking, it is more appropriate to lower the risk weight.

　　By the end of 2022, the general debt of local governments was 1,438.96 billion yuan, and 86% of domestic local debt was held by commercial banks. It is estimated that the reduction of general debt risk weight will save banks 1,237.5 billion yuan (143,896 * 0.86 * 0.1). "Lowering the risk weight of general debt will provide space for commercial banks to increase their holdings of government debt and further support the medium and long-term expansion of government debt." He said.

　　In addition, the risk weight of investment-grade corporate bonds is lowered from 100% to 75%, and investment-grade companies are identified from eight specific indicators, such as operating risk, debt risk and profit level.

　　The agency predicts that most bonds issued by large central enterprises and listed companies will be recognized as investment-grade corporate bonds, but the number of urban investment bonds that can be included in this standard is small. This will help commercial banks to allocate high-quality credit bonds, improve the transaction depth of high-quality credit bonds and reduce financing costs.

　　The allocation of secondary capital bonds may decline.

　　Since the net value of wealth management products fluctuated greatly, the change of tier-2 capital bonds has received great attention. This new regulation has increased the risk weight of tier-2 capital bonds of banks from 100% to 150%, which also has a considerable impact on this asset class.

　　As of the beginning of February 2023, the balance of domestic banks’ tier 2 capital bonds was about 5.3 trillion yuan. "Adjusting the risk weight may cause an impact. It will be more difficult for banks to hold each other when issuing Tier 2 capital bonds, and banks will reduce their allocation and market liquidity will be weakened." Wang Qiangsong said.

　　Liao Zhiming, chief banking analyst of China Merchants Securities, told reporters: "The new regulations have adjusted the risk weight of tier-two capital bonds of banks, insurance and brokers to 150%, and TLAC (total loss absorption capacity) bonds are also 150%, compared with the current 100%. There is a big increase. The risk weight of tier-2 capital bonds increased in line with expectations, and the incremental impact was controllable. However, the key to follow-up depends on the growth of wealth management scale. "

　　Among the bank capital replenishment tools, secondary capital bonds and perpetual bonds are the main components, and the circulation has increased significantly in recent years. Earlier, tier-2 capital bonds were preferred assets held by banking financial subsidiaries. However, at one time, due to the fluctuation of bond market, the net value fluctuated greatly, which led to a sharp drop in prices caused by bond market selling and investor redemption. This also once caused the market to worry about wealth management or continue to reduce its holdings of tier 2 capital bonds.

　　Yu Jinxin, an analyst at Minsheng Securities, said earlier that all levels of capital of domestic commercial banks have corresponding supplementary tools, among which tier-2 capital bonds and perpetual bonds are significantly ahead, supplementing tier-2 capital and other tier-1 capital of banks respectively. In recent years, the issuance of secondary capital bonds and perpetual bonds has increased significantly. By the end of May 2022, the total stock scale reached 4.98 trillion yuan, of which the issuance scale of state-owned banks was dominant, and the number of urban and rural commercial banks was relatively high. "Although the new asset management regulations have brought new investment constraints to tier-2 capital bonds and perpetual bonds, the asset mismatch may still make these two types of bonds lack alternative assets. Therefore, we believe that the investment demand is still resilient, but there may be two changes. One is that the duration is moderately shortened, and the other is that the transaction attributes are enhanced."

　　Most viewpoints hold that, as far as Tier 2 capital bonds are concerned, although the scale growth of bank wealth management funds is still uncertain, the overall allocation of insurance funds may remain stable under the long-term gap between assets and liabilities and policy support.

　　The impact on bank capital adequacy ratio is limited.

　　Generally speaking, most institutions believe that the implementation of the new regulations has limited impact on the capital adequacy ratio of domestic commercial banks, and it is expected that the capital adequacy ratio of banks will be slightly improved due to the reduction of the credit risk weight of investment-grade enterprises.

　　The bright spot is that the policy supports the growth of consumer loans and mortgage loans. Under the new regulations, the risk weight of banks with a high proportion of mortgage loans and retail business is lowered, and the capital adequacy ratio is expected to increase.

　　Specifically, Wang Qiangsong told reporters that the risk weight of credit cards was lowered, and the risk weight of credit lines (unused lines) below 1 million yuan was adjusted from 50% to 20%, and the definition of qualified traders was proposed, and the risk weight of use lines was adjusted from 75% to 45%; In terms of housing mortgage loan, the repayment source does not depend on the real estate cash flow (that is, the solvency of the purchaser is valued), and the risk weight is lowered — — If the down payment ratio is more than 40%, it will be reduced from 50% to 40%, and if the down payment ratio is 30%, it will be reduced from 50% to 45%, which is beneficial to both the first set and the second set.

　　At the same time, under the new regulations, the risk weight of SMEs is 85%, which is lower than the current 100%. Liao Zhiming believes that this is good for city commercial banks with relatively high credit for SMEs. The risk exposure of small and medium-sized enterprises refers to the creditor’s rights of commercial banks to enterprises whose operating income in the last year does not exceed 300 million yuan and meets the identification standards of medium, small and micro enterprises stipulated by relevant state departments, but does not include the creditor’s rights to small and micro enterprises and investment-grade companies.