The recent rise in Chinese banks’ global systemically important bank (G-SIB) scores may take a hit due to the latest regulatory clampdown, opined credit rating agency Fitch.

In the last few years, there has been a surge in interbank activity among Chinese banks. Fitch said that the new regulations, which restrict this interbank activity and entrusted investments, can result into lower G-SIB scores for some Chinese banks in their 2018 assessments.

G-SIB status requires the banks to fulfil extra common-equity Tier 1 (CET1) requirements. In the 2017 assessments based on end-2016 data, the G-SIB scores of most Chinese banks improved.

The assessments were made following Basel III methodology.

Two G-SIB banks- China Construction Bank and Bank of China rose to capital buffer bucket 2 from bucket 1 where they are subject to a 1.5% CET1 buffer instead of 1.0%.

In the last assessment, the G-SIB score of few mid-tier banks also increased due to rise in interbank activity and entrusted investments.

The new regulatory restrictions are being implemented since early 2017 in an attempt to reduce shadow-banking activity and associated financial risks.

Accordingly, it was reported that interbank assets, liabilities and entrusted investments declined in the first three quarters of 2017, a majority of which are mid-tier banks.

From 2025, Chinese G-SIBs will also need to fulfil total loss absorbing capacity requirements that will increase their total capital requirements to 16% of risk-weighted assets.