SHANGHAI — China on Friday told its “Big Four” sovereign lenders that they can issue loss-absorbing bonds to prevent the spread of potential instability in its financial system.

The country’s banking regulator said it sent notices to the Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China and China Construction Bank.

The four lenders are classified as global, systemically important banks by Chinese regulators and the Switzerland-based Financial Stability Board (FSB). They are all under pressure to meet Total Loss Absorbing Capacity (TLAC) targets from 2025 onwards.

Loss-absorbing bonds, which are not part of a bank’s capital base, may be written off or converted into common stock when the bank enters the divestment phase, the China Banking and Insurance Regulatory Commission said.

The regulator urges issuers of such bonds to adopt a market-based pricing mechanism to make them attractive to investors.

Meanwhile, issuers are prohibited from directly or indirectly purchasing loss-absorbing bonds that they have sold themselves.

China last year released rules requiring the “Big Four” banks to hold a TLAC amount of at least 16 percent of risk-weighted assets from January 1, 2025, and the bar will widen further to 18 percent from January 1 raised. 2028

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