20/08/2019 17:38

Ties between China's banks and insurers raise systemic risk

[ET Net News Agency, 20 August 2019] Easing regulations have allowed China's insurers
to increase holdings in bank-related assets, including capital instruments. This benefits
banks that need capital, and insurers looking for yield and duration. However, growing
financial-sector cross-holdings could multiply systemic risk, S&P Global Ratings said in a
report published today, "China Credit Spotlight: The Ties That Bind Banks And Insurers."
"While bank-capitalization instruments widen the scope of investment options for
insurers, there are risks. The main one is concentrated holdings in financial sector
assets," said S&P's credit analyst Eunice Tan.
China's insurers are short on investment options. The country's evolving capital markets
still lack depth, overseas investments are restricted, and there is a limited supply of
long-dated central-government bonds. As a result, exposure to the country's banks tends to
be high, including through equity and deposits. S&P expects the concentration to rise
further after regulators eased investment limitations for the insurance sector earlier
this year.
This year's introduction of perpetual bonds issuance among domestic banks adds another
investment option for insurers. Banks have already either completed or announced RMB673
billion (US$95 billion) in perpetual bond issuance.
Perpetual bonds provide a new channel at relatively low costs for banks to raise
additional tier-1 (AT1) capital. The agency expects the pipeline to remain strong for
perpetual bonds, as well as for preference shares, another AT1-capital instrument for
"Banks are issuing capital instruments to meet regulatory requirements in the face of
limited ability to accumulate capital internally," said S&P's credit analyst Liang Yu.
"More broadly, the largest domestic banks face a nudge to support GDP growth by providing
funds and liquidity to favored sectors--private and small and micro enterprises."
Bank-capitalization instruments have higher yields than Chinse government bonds, and
they also offer duration to help insurers' match longer-term liabilities. The debt is
subordinate - meaning debtholders effectively won't get paid back if the bank fails or its
capital sharply erodes.
However, given that most such instruments are issued by China's largest banks, many
investors consider them to be "too big to fail," i.e., authorities would not allow
premiere banks to get weak enough to trigger the point of non-viability.
The downside is concentration risk which, in our view, extends beyond the insurance
sector's holdings of bank-related assets. Many Chinese banks hold peers' capital
instruments. While measures are in place to limit concentration risk, S&P believes such
cross-holdings are prevalent and would add to systemic risks in the event of distress.
"China's regulators have been fairly explicit in their view that the insurance industry
can and should play a role in stabilizing economic cycles and managing risks," said Tan.
As such, insurers may be tasked to provide additional capital to support national
interests. In extreme cases, there could be pressure for insurers to maintain holdings in
bank securities in the event of crisis." (KL)

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