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TLAC Non-Capital Bond Supply and Investment Analysis

This report examines the Total Loss Absorbing Capacity (TLAC) non-capital bonds, a new credit bond in China's market, focusing on its regulatory framework, supply calculations, key features, international context, investment value, and risks.

TLAC Regulatory Framework

The TLAC system originated from the 2008 financial crisis, with international standards developed by the Financial Stability Board (FSB). In China, it was implemented through 2021 and 2022 regulations, requiring Global Systemically Important Banks (G-SIBs) to meet minimums: external TLAC risk-weighted ratio of 16% by 2025 and 18% by 2028, escalating to 675% leverage ratio by 2028. This framework aims to ensure banks can absorb losses during resolution.

Supply Estimation

Based on 2024 projections for the five major state-owned banks, the TLAC gap is estimated at 167 trillion to 204 trillion yuan, driven by factors like net profits, credit expansion, and capital rules. About 8-12 trillion yuan of TLAC non-capital bonds could be issued, potentially competing with secondary capital bonds, as banks face strong capital replenishment needs in a low-yield environment.

Bond Terms and Features

TLAC non-capital bonds are designed for loss absorption, not capital increase, and are subordinated to other debts. They must include write-down or conversion clauses, and have flexible terms like "3+1" or "5+1". Holders typically include non-financial products and bank entities due to similar risk characteristics as secondary capital bonds.

International Market Overview

Globally, TLAC tools involve various bonds, with the U.S. leading in non-capital bonds, mostly long-term (84% of holdings are 5 years or longer). Yields are higher for some instruments, but transactional demand is strong due to market dynamics.

Investment Value Outlook

TLAC non-capital bonds offer strong safety due to high issuer credit quality, tight regulatory compliance, and good liquidity. In a market with asset shortages, they provide additional investment options with yields aligned to secondary capital bonds, potentially enhancing portfolio value amidst market volatility.

Risk Considerations

Risks include potential data inaccuracies and policy execution delays, which could affect the actual issuance and market uptake.

This analysis highlights the growing role of TLAC non-capital bonds in financial markets, emphasizing their strategic investment merits under current economic conditions.