What Signal Does Regulators' Reiteration of Diversified Supplementation for Small and Medium-sized Financial Institutions' Capital Release?

Securities Times Reporter Qin Yanling

The Financial Regulatory Administration recently reiterated the need to “study diversified methods to supplement the capital of small and medium-sized financial institutions,” sending a strong policy signal. Currently, some small and medium-sized banks are facing urgent core Tier 1 capital shortages, and accelerating the strengthening of their safety buffers is a practical necessity to prevent and resolve financial risks. Against this backdrop, local government special bonds, which have proven effective in practice for supplementing small and medium-sized banks’ capital, have once again become a market focus. So, is the time right for the regular issuance of small and medium-sized bank special bonds? What other diversified channels are available in the future?

Regulatory Reiteration

Capital Supplementation for Small and Medium Financial Institutions

The Party Committee of the Financial Regulatory Administration recently held an expanded meeting, mentioning the need to “promote state-owned large commercial banks to supplement capital and explore diversified methods to supplement the capital of small and medium-sized financial institutions.”

This follows the 2025 clarification that “comprehensive measures such as supplementary capital, mergers and acquisitions, and market exit will be used to classify and resolve risks.” The Financial Regulatory Administration has once again, at a system-wide meeting, detailed plans for capital supplementation for small and medium financial institutions.

The former China Banking and Insurance Regulatory Commission (CBIRC) mentioned multiple times in its annual work conferences in 2021, 2022, and 2023 that small and medium-sized banks should supplement capital through multiple channels; this task was not explicitly mentioned in the 2024 and 2025 regulatory work meetings. However, on March 13, 2025, the Party Committee of the Financial Regulatory Administration emphasized that in 2025, “comprehensive measures such as supplementary capital, mergers and acquisitions, and market exit will be used to classify and resolve risks.” On January 15, 2026, the administration held a regulatory work conference reviewing 2025, also mentioning support for financial institutions to supplement capital through multiple channels. Two months later, a measure that had already seen progress last year was further specified as “research diversified methods to supplement the capital of small and medium-sized financial institutions.”

Guotai Junan Securities’ Chief Bank Analyst Ni Jun told Securities Times that this is an inevitable choice resulting from four overlapping factors: First, in recent years, the capital adequacy ratio of small and medium-sized banks has remained below the industry average, with some institutions’ core Tier 1 capital approaching regulatory red lines, and the ongoing disposal of non-performing assets continuously consuming capital. Regional financial risks have increased, making capital supplementation key to preventing regional risks. Second, the persistent narrowing of net interest margins has significantly weakened the endogenous capital replenishment capacity of small and medium-sized banks, while external financing channels remain narrow, intensifying capital supply-demand conflicts. Third, the industry’s concentration and merger process will accelerate in 2026, and capital adequacy is a basic prerequisite for institutions to participate in consolidation and transformation. Fourth, the previous demonstration effect of state-owned banks supplementing capital through special national bonds has created a model, and there is an urgent need to simultaneously address the capital shortfalls of small and medium-sized institutions to build a comprehensive industry-wide capital safety net. Therefore, regulators have re-emphasized the importance of capital supplementation for small and medium-sized institutions.

For large state-owned banks, this year’s government work report explicitly proposed issuing 300 billion yuan in special national bonds to support their capital replenishment. As an important part of the overall incremental policy, the “national plan to increase core Tier 1 capital for six large commercial banks” was first mentioned on September 24, 2024. Li Yunze, Director of the Financial Regulatory Administration, clarified at that time that the implementation would follow a “coordinated, phased, and tailored” approach.

In 2025, Construction Bank, Bank of China, Bank of Communications, and Postal Savings Bank received an initial injection of 500 billion yuan in special national bonds. By the end of the third quarter of 2025, the core Tier 1 capital adequacy ratios of these four state-owned banks were 14.36%, 12.58%, 11.37%, and 10.65%, respectively, representing increases of 0.38, 0.76, 1.12, and 1.44 percentage points from the end of Q1 2025. Industry analysts generally expect that the 300 billion yuan in special bonds this year will be used to supplement the capital of Industrial and Commercial Bank of China and Agricultural Bank of China. As of the end of Q3 2025, ICBC and ABC’s core Tier 1 capital adequacy ratios were 13.57% and 11.16%, respectively, both slightly lower than the 14.1% and 11.42% at the end of 2024.

Proactive “Self-Help” by Small and Medium Banks

For many small and medium financial institutions, especially small and medium-sized banks, the lack of external capital channels has long been a “chronic problem.” Under the overall regulatory guidance of “reducing volume and improving quality” for small and medium financial institutions, these banks are actively seeking to replenish capital through self-help measures.

According to publicly approved disclosures from financial regulators, as of March 18, more than 40 small and medium-sized banks have increased registered capital through methods such as cash capital increases, rights issues/directed offerings, capital reserve transfers, and profit reinvestment.

Overall, the amounts involved in these capital changes are relatively small. The largest is Shanxi Bank, which directly increased capital by over 1.4 billion yuan; other banks with increases exceeding 100 million yuan include Chengdu Bank, Dongying Bank, Nanchang Rural Commercial Bank, Tai’an Rural Commercial Bank, Huai’an Xingfu Rural Bank, and Jiangxi Ganchang Rural Commercial Bank. The sources of new capital include local government finances, market-based tools, and shareholder contributions.

For example, Shanxi Bank, which has received the largest approved capital increase this year, sourced all new capital from the Shanxi Provincial Finance Department; Chengdu Bank’s nearly 500 million yuan increase came from convertible bonds; Jiangxi Ganchang Rural Commercial Bank’s 110 million yuan increase was from Jiangxi Rural Commercial Bank’s equity injection.

Compared to these, capital raised through issuance of capital supplement tools is larger in scale. Since the beginning of the year, banks such as Guangzhou Bank, Qishang Bank, Qingdao Bank, Dongguan Rural Commercial Bank, Zhongshan Rural Commercial Bank, and Jilin Bank have been approved to issue Tier 2 bonds, perpetual bonds, and perpetual capital bonds. Among them, Jilin Bank and Guangzhou Bank have been approved for maximum quotas of 15 billion yuan in Tier 2 bonds and 10 billion yuan in unrestricted capital instruments, respectively.

However, in terms of actual effectiveness, cash capital increases and rights issues/directed offerings are generally more advantageous.

Total bank capital includes Tier 1 and Tier 2 capital, with Tier 1 further divided into core Tier 1 and other Tier 1 capital. Core Tier 1 capital is the most critical buffer in all capital safety layers, absorbing losses in daily operations first and foremost.

“Cash capital increases, including new share issuance or additional contributions by existing shareholders, are truly external ‘blood transfusions,’” said Zeng Gang, Chief Expert and Director of the Shanghai Financial and Development Laboratory, in an interview with Securities Times. “New funds flowing into banks, increasing paid-in capital, and if the issuance price exceeds face value, also including share premium into capital reserves, directly increase core Tier 1 capital, making it the most effective way to supplement capital.”

Zeng Gang pointed out that rights issues/directed offerings are essentially the same as cash capital increases—they both involve issuing new shares to specific or unspecified shareholders to raise genuine funds. As new capital enters with real incremental funds, core Tier 1 capital increases net, and rights issues have become the main channel for non-listed small and medium-sized banks’ capital expansion.

Where Are the Diversified Channels?

During this year’s National People’s Congress and Chinese People’s Political Consultative Conference, many representatives and committee members proposed optimizing the issuance of local government special bonds to enhance policy support for capital supplementation of small and medium-sized banks. For example, Liu Ya, a deputy to the National People’s Congress and President of the Beijing Branch of China Export-Import Bank, suggested that under the guidance of national financial regulators, provinces should regularly issue small and medium-sized bank special bonds to help establish a long-term capital replenishment mechanism; a deputy from Zhejiang proposed opening channels for small and medium-sized financial institutions to supplement capital through special bonds in a “self-review and self-issuance” manner.

In July 2020, the State Council decided to allow local government special bonds to reasonably support small and medium-sized banks’ capital supplementation. As an innovative tool, the first issuance of such bonds for small and medium-sized banks was completed in December of that year; subsequent issuances occurred in 2023, with a gradual winding down in 2024. According to the People’s Bank of China, from 2020 to 2022, 550 billion yuan of local government special bonds were issued, specifically for supplementing small and medium-sized banks’ capital.

There are also industry experts who oppose the normalization of using local government special bonds for this purpose. Professor Wen Laicheng of the Central University of Finance and Economics told Securities Times that currently, state capital dominates the banking sector, and there is no need for further equity injections to maintain control. Using special bonds to supplement small and medium-sized banks’ capital is mainly to prevent financial risks and stabilize development at this stage, so it is unlikely to become a routine support measure. Even if future support through special bonds is considered, it should be selective, ensuring repayment and avoiding fiscal risks.

Ni Jun also believes that full normalization of small and medium-sized bank special bonds is relatively unlikely. The reason is that, to prevent the blurring of fiscal and financial risks, avoid moral hazard, and prevent excessive local government intervention, it is difficult to break through the current fiscal discipline framework in the short term.

However, last July, Jilin Province issued 26 billion yuan in special bonds to support small and medium-sized banks, with funds transferred from the Jilin Provincial Finance Department to Jilin Financial Holdings Group, which then invested in Jilin Rural Commercial Bank to improve its capital adequacy and risk resistance. This case is viewed as a “restart” of small and medium-sized bank special bonds.

“With the latest regulatory signals for 2026, the pace of supporting small and medium-sized banks through special bonds has clearly accelerated,” Ni Jun said. “The Jilin case represents an upgrade from dispersed injections to a model that supports provincial rural commercial banks, providing a replicable example for many regions nationwide; at the same time, the regulatory mention of ‘researching diversified methods to supplement the capital of small and medium-sized financial institutions’ signals support.”

Therefore, it is expected that in 2026, there may be an expansion of special bond quotas or a shift in their use (e.g., from capital supplementation to mergers and acquisitions). In actual policy implementation, Ni Jun believes that special bonds will still serve as a key tool for phased relief, with more routine support for M&A and restructuring use innovations.

Additionally, Li Yunze mentioned during this year’s NPC and CPPCC sessions that “more social funds, such as insurance funds, can be explored through market-based approaches,” further opening up market possibilities. Ni Jun stated that long-term funds like insurance and social security funds entering equity investments, as well as innovations like convertible capital instruments, will gradually expand to meet the diverse needs of small and medium-sized banks, forming a long-term support mechanism.

As industry experts repeatedly emphasize, capital supplementation is only one step in the reform and risk mitigation of small and medium-sized financial institutions. Future efforts should also include introducing strategic investors, optimizing equity structures and corporate governance, and shifting from external “blood transfusions” to internal “self-sustaining” growth, laying a foundation for long-term high-quality development.