PBOC Sets Up Swap Tool to Aid Bank Capital via Perpetual Bonds

(Bloomberg) -- The People’s Bank of China said it is setting up a new facility to encourage banks to replenish capital by issuing perpetual bonds, in a further move aimed at securing financing for the flagging economy.

  • The new tool, called Central Bank Bills Swap, works by giving primary dealers bills that can be used as high-quality collateral in exchange for perpetual bonds purchased from banks. The step coincides with the planned issuance on Friday of the first such instrument by a Chinese lender

Key Insights

  • The PBOC also announced it’ll include perpetual bonds sold by banks with a rating equal or higher than AA as eligible collateral for monetary policy operations -- Medium-term Lending Facility, targeted MLF and Standing Lending Facility
  • The move can improve the liquidity of banks’ perpetual bonds, and support them to issue such bonds to replenish capital, the PBOC said in the statement
  • Chinese banks need stronger capital buffers as they are being compelled to move off-balance-sheet lending onto their books, at a time when they’re facing a higher rate of soured loans as the economy slows
  • Perpetual bonds are debt with no maturity date, meaning the funds generated through their sale can act as capital

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  • Bank of China Ltd. is set to offer the first perpetual bond of as much as 40 billion yuan
  • The PBOC said that as the new swap facility does not generate new currency, the impact on the liquidity of the banking system is neutral
  • The PBOC set a range of conditions for eligibility to apply, the first of which is that the bank’s capital adequacy ratio should not have been below 8 percent at the end of the most recent quarter
  • A Q&A on the new instrument, in Chinese, is available here

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