General Overview
An assessment conducted on banking supervision in China in 2004 and published in the Journal for Chinese Law (a publication by the German-Chinese Lawyers Association), indicated that the Chinese regulatory framework shows a high degree of compliance with the Basel Core Principles (BCPs). Hence, on a de jure basis China is getting closer to international prudential requirements. This shows Chinese self-commitment to the rules of the "international community" in order to become a reliable global partner. However, Chinese politics is traditionally built upon political control - which contradicts the concept of independent supervision as intended by the BCPs. In fact the 2003 Law of the People's Republic of China on Banking Regulation and Supervision (LoBRS) allows for discretion and political interference of the central government raising suspicion that the Core Principles serve as an external stick for structural changes in order to tighten control over local agents. In this case de facto compliance presumably will be restricted to the central leadership's power politics. (Brehm & Macht 2004, p. 327)
A 2006 working paper by the International Monetary Fund (IMF), reports that banking reforms are at the core of China's strategy to improve the intermediation of its large private sector savings. The China Banking Regulatory Commission (CBRC) has made progress in improving bank supervision, but more effort is required. Substantial improvements in banking regulation have been made in recent years, including in the critical areas of asset classification and provisioning and capital adequacy. The new capital adequacy requirements, which require banks to fully provision for their nonperforming loans (NPLs) and maintain at least 8 percent of aggregate capital adequacy, were adopted in 2004 and will become fully binding as of 2007. Strengthening capital adequacy requirements was a major step in creating a standard regulatory environment, but it will be a major test for the CBRC to ensure that all banks achieve compliance and that no precedent of forbearance is created. At end-2004, 30 banks accounting for 48 percent of commercial bank assets were in compliance and the total shortfall in provisioning stood at Chinese Yuan (RMB) 960 billion ($116 billion). In 2004, the CBRC also issued and revised a number of other regulations and took steps to strengthen on-site examinations and monitoring of large exposures and connected lending, introduced a risk-based supervisory system for city commercial banks. (IMF 2006, pp. 3, 19)
Based on the findings of another report in 2006 by the Bank for International Settlements (BIS), over the past decade, there has been significant progress in strengthening banking supervision in China, along with the establishment of a supervisory legal framework and the deepening of banking reform. Since 2002, in convergence with the international trend, China's banking supervision has shifted from emphasizing regulatory compliance only to emphasizing both regulatory compliance and risk supervision. Since the establishment of the CBRC in 2003, supervision has become better targeted and the new supervisory concept of "supervision of legal person, risks, and internal control and greater transparency" has been formed; new standards have also been put into place. A five-category classification of loans, the CAMEL rating system and other prudential regulations have been introduced. Corporate governance and internal control mechanisms have become the focus of supervision. Offsite surveillance and onsite supervision complement each other in ongoing prudential supervision. A risk assessment system and an early warning mechanism have also been set up. (BIS 2006, p. 186)
The reform of China's banking sector was carried out against the background of the country's transition from a planned economy to a market economy. Prior to the reform and the opening up of China to the rest of the world, the country's banking system consisted of only one financial institution, the People's Bank of China (PBC). It was not until 1984, when the Industrial and Commercial Bank of China (ICBC) was separated out from the PBC that China became a dual banking system with the PBC acting as the central bank and ICBC, China Construction Bank (CCB), Bank of China (BOC) and Agricultural Bank of China (ABC) as the specialized banks. At that time even though these specialized banks were given some discretion over business operations, within the framework of the planned economy they had limited power in extending credits. (BIS 2006, p. 181)
On April 28th 2003, the Chinese leadership transferred responsibilities for banking supervision to the newly created CBRC. Following this structural change the legal basis for banking in the PRC was extended through the Law of the People's Republic of China on Banking Regulation and Supervision (LoBRS) and the Regulation Governing Capital Adequacy of Commercial Banks (New Capital Rules, NCR). Senior officials state that the LoBRS constitutes the Chinese approach to adopt the BCP, whereas the NCR corresponds to Basel I1 together with supervisory review and disclosure requirements of Basel II. (Brehm & Macht 2004, p. 318)
The financial legal framework also consists of the Law of the People's Republic of China on Commercial Banks (LoCB), and the Law of the People's Republic of China on the People's Bank of China (LoPBC). (Brehm & Macht 2004, p. 317)
As of October 2005, there were more than 30,000 banking institutions in China, including 3 policy banks, 4 state-owned commercial banks, 13 joint-stock commercial banks, 115 city commercial banks, 626 urban credit cooperatives, 30,438 rural credit cooperatives, 57 rural cooperative/commercial banks, 238 subsidiaries of foreign banks, 4 asset management companies, 59 trust and investment companies, 74 finance companies affiliated to business groups, 12 financial leasing companies, 5 auto financing companies, plus a large number of postal savings institutions. (IIB 2006, p. 71)
The Principles
1. (1) Clear responsibilities and objectives for each supervisory agency. |
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An assessment conducted on banking supervision in China in 2004 indicated that the Chinese regulatory framework shows a high degree of compliance with the Basel Core Principles (BCPs). Hence, on a de jure basis China is getting closer to international prudential requirements. (Brehm & Macht 2004, p. 327)
The 2004 assessment indicates that the Law of the People's Republic of China on Banking Regulation and Supervision (LoBRS) meets most of the BCP 1 requirements. According to the LoBRS the China Banking Regulatory Commission (CBRC) is in charge of banking surveillance with the exception of issues concerning foreign exchange or national monetary policy. It therefore constitutes the main supervisory body for banking institutions in China. (Brehm & Macht 2004, p.318)
In China, supervisory responsibilities are shared between the People's Bank of China (PBC) and the CBRC. The PBC is responsible for maintaining financial stability. It therefore monitors and assesses the situation of the financial market, supervises banking institutions, 15 other groups and individuals, and may conduct investigations. The CBRC is in charge of regulating banking services. It has absorbed functions from the PBC and the Central Financial Work Commission, which served as a powerful authoritative instrument of government oversight of the banking system. 17 Art. 2 of LoBRS specifies the Banking Regulatory Authority under the State Council as the agency responsible for conducting the supervision of national banking institutions and their business activities. This is somewhat confusing, as there are two different terms - Banking Regulatory Authority and China Banking Regulatory Commission - which address the same entity, the CBRC. (Brehm & Macht 2004, p. 317)
Based on the finding of a 2006 report by the Bank for International Settlements (BIS), over the past decade, there has been significant progress in strengthening banking supervision in China, along with the establishment of a supervisory legal framework and the deepening of banking reform. Since 2002, in convergence with the international trend, China's banking supervision has shifted from emphasizing regulatory compliance only to emphasizing both regulatory compliance and risk supervision. (BIS 2006, p. 186)
1.(2) Operational independence and adequate resources. |
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An assessment conducted on banking supervision in China in 2004 indicated that the Chinese regulatory framework shows a high degree of compliance with the Basel Core Principles (BCPs). Hence, on a de jure basis China is getting closer to international prudential requirements. However, the 2003 Law of the People's Republic of China on Banking Regulation and Supervision (LoBRS) allows for discretion and political interference of the central government raising suspicion that the Core Principles serve as an external stick for structural changes in order to tighten control over local agents. In this case de facto compliance presumably will be restricted to the central leadership's power politics. (Brehm & Macht 2004, p. 327)
Although the LoBRS addresses many of the BCP 1 stipulations, operational independence is not fully reflected by the LoBRS since some rules are ambiguous with respect to the role of the State Council and the Chinese Communist Party (CCP). The State Council and the CCP have various channels to exert control over the China Banking Regulatory Commission (CBRC). The State Council can issue regulations overruling those of the supervisory body or use the Audit and Supervisory Institution to put pressure on the CBRC. The CCP may interfere via its authority to recruit and dismiss personnel. (Brehm & Macht 2004, p. 318)
The hierarchy of laws, where the State Council is eligible to issue regulations senior to provisions of the CBRC creates problems in terms of possible political interference. Decisions of the State Council create a powerful instrument to shape the operational scope of the CBRC and might be used to control the supervisory process. Furthermore the CBRC is subject to the oversight by government agencies under the State Council such as the Audit Institution and the Supervisory Institution. (Brehm & Macht 2004, p. 318)
The CBRC might consider itself forced to act in obedience to 'political recommendations' because the State Council has a say in its surveillance. This certainly contradicts the BCP 1 requirement that supervisory bodies need to pursue their duties free from political pressure. Furthermore the CCP exerts a strong influence, because it controls the appointment and dismissal of all elites by means of the nomenclature system as well as by the party core groups (ministerial level) and party committees (all other levels), which represent the Party's interests within government entities. Hence, even though Art. 9 and 10 of LoBRS claim that supervisory staff must have professional skills, work experience, and the integrity required for performing their duties, skepticism remains as to whether this will restrict the consideration of political merits as a criterion for appointment. (Brehm & Macht 2004, p. 318)
A further specification of BCP 1 - adequate resources to guarantee an effective supervision - is also in doubt. The CBRC may only collect fees amounting to five billion RMB (about $620m) from commercial banks, which are differentiated by risk level and bank type. The budget must meet all expenditures of the CBRC including personnel, equipment and a branch network of 31 provincial, 400 city and 650 to 680 county offices. Due to the Central State's interests and means of intervention, meeting these requirements proves a difficult task for the CBRC. On the one hand the agency needs to put pressure especially on the State-owned Commercial Banks (SOCBs) to improve their business operation's efficiency and the quality of their risk management, on the other hand the CBRC must allow them to continue to operate irrespective their financial situation, which weakens the supervisory body's authority to enforce prudential regulations and gives leeway for supervisory forbearance. (Brehm & Macht 2004, p. 318)
1.(3) A suitable legal framework for authorization and ongoing supervision. |
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An assessment conducted on banking supervision in China in 2004 indicated that the Chinese regulatory framework shows a high degree of compliance with the Basel Core Principles (BCPs). Hence, on a de jure basis China is getting closer to international prudential requirements. (Brehm & Macht 2004, p. 327)
The 2004 assessment indicates that the Law of the People's Republic of China on Banking Regulation and Supervision (LoBRS) meets most of the BCP 1 requirements. The LoBRS states that banking regulation should be exerted with the objective of promoting the safety and soundness of the banking industry and maintain public confidence in the banking industry. Art. 4 of LoBRS demands that the CBRC exercises regulation and supervision in accordance with laws and regulations. Additionally, Art. 5 of LoBRS requires that there shall be no interference by local governments, government departments on various levels, public organizations or individuals. (Brehm & Macht 2004, p. 318)
Based on a 2006 report by the Bank for International Settlements (BIS), in the past decade, there has been significant progress in strengthening banking supervision in China, along with the establishment of a supervisory legal framework and the deepening of banking reform. Since 2002, in convergence with the international trend, China's banking supervision has shifted from emphasizing regulatory compliance only to emphasizing both regulatory compliance and risk supervision. (BIS 2006, p. 186)
1.(4) A suitable legal framework to address compliance with laws as well as safety and soundness concerns. |
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An assessment conducted on banking supervision in China in 2004 indicated that the Chinese regulatory framework shows a high degree of compliance with the Basel Core Principles (BCPs). Hence, on a de jure basis China is getting closer to international prudential requirements. (Brehm & Macht 2004, p. 327)
The 2004 assessment indicates that the Law of the People's Republic of China on Banking Regulation and Supervision (LoBRS) meets most of the BCP 1 requirements. Art. 3 of the LoBRS states that banking regulation should be exerted with the objective of promoting the safety and soundness of the banking industry and maintain public confidence in the banking industry. Art. 4 of LoBRS demands that the CBRC exercises regulation and supervision in accordance with laws and regulations. (Brehm & Macht 2004, p. 318)
Based on a 2006 report by the Bank for International Settlements (BIS), in the past decade, there has been significant progress in strengthening banking supervision in China, along with the establishment of a supervisory legal framework and the deepening of banking reform. Since 2002, in convergence with the international trend, China's banking supervision has shifted from emphasizing regulatory compliance only to emphasizing both regulatory compliance and risk supervision. (BIS 2006, p. 186)
When a banking institution fails to meet prudential rules and regulations, the banking regulatory authority under the State Council or its provincial office shall require it to take remedial measures within a prescribed period of time. If the banking institution fails to correct the deficiencies within the prescribed period of time, or the safety and soundness of the banking institution is likely to be severely threatened and the interests of its depositors and other customers are likely to be jeopardized, the banking regulatory authority under the State Council or its provincial office may, subject to the approval of its chief responsible officer, take the following measures depending on the severity of the circumstances: (1) to suspend part of the businesses of the banking institution and/or withhold approval of new products or services; (2) to restrict dividend or other payments to shareholders; (3) to restrict asset transfers; (4) to order the controlling shareholders to transfer shares or restrict the powers of relevant shareholders; (5) to order the banking institution to replace the directors and/or senior managers or restrict their powers; and (6)to withhold approval of branching. The banking institution shall report to the banking regulatory authority under the State Council or its provincial office once it is restored to meet the prudential rules and regulations after taking corrective measures. The banking regulatory authority under the State Council or its provincial office shall terminate the measures prescribed in the preceding paragraph within three days after the verification of compliance. (LoBRS 2003)
When a banking institution is experiencing or likely to experience a credit crisis, thereby seriously jeopardizing the interests of depositors and other customers, the banking regulatory authority under the State Council may take over the banking institution or facilitate a restructuring. The take-over or restructuring shall be carried out in accordance with applicable laws and administrative regulations. (LoBRS 2003)
When a banking institution has been found serious violation of laws and regulations, or significant unsafe or unsound practices, thereby seriously threatening financial order and public interests unless it is closed, the banking regulatory authority under the State Council shall have the authority to close the institution in accordance with applicable laws and regulations. (LoBRS 2003)
1.(5) Legal protection for supervisors. |
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An assessment conducted on banking supervision in China in 2004 indicated that the Chinese regulatory framework shows a high degree of compliance with the Basel Core Principles (BCPs). Hence, on a de jure basis China is getting closer to international prudential requirements. (Brehm & Macht 2004, p. 327)
The 2004 assessment indicates that the Law of the People's Republic of China on Banking Regulation and Supervision (LoBRS) meets most of the BCP 1 requirements. Art. 5 of LoBRS protects its regulators, while they perform supervisory responsibilities. (Brehm & Macht 2004, p. 318)
According to LoBRS, the banking regulatory authority and its supervisory staff shall be protected by law while performing supervisory responsibilities in accordance with laws and regulations. There shall be no interference by local governments, government departments at various levels, public organizations or individuals. (LoBRS 2003)
Based on the finding of a 2006 report by the Bank for International Settlements (BIS), over the past decade, there has been significant progress in strengthening banking supervision in China, along with the establishment of a supervisory legal framework and the deepening of banking reform. Since 2002, in convergence with the international trend, China's banking supervision has shifted from emphasizing regulatory compliance only to emphasizing both regulatory compliance and risk supervision. (BIS 2006, p. 186)
1.(6) Arrangement for sharing of information between supervisors and protection of confidentiality of shared information. |
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An assessment conducted on banking supervision in China in 2004 indicated that the Chinese regulatory framework shows a high degree of compliance with the Basel Core Principles (BCPs). Hence, on a de jure basis China is getting closer to international prudential requirements. (Brehm & Macht 2004, p. 327)
The 2004 assessment indicates that the Law of the People's Republic of China on Banking Regulation and Supervision (LoBRS) meets most of the BCP 1 requirements. Regarding information, Articles 6 and 7 of the LoBRS allow the CBRC to share information with other national and international regulatory authorities and Art. 11 of LoBRS assures the confidentiality of information. (Brehm & Macht 2004, p. 318)
Based on the finding of a 2006 report by the Bank for International Settlements (BIS), over the past decade, there has been significant progress in strengthening banking supervision in China, along with the establishment of a supervisory legal framework and the deepening of banking reform. Since 2002, in convergence with the international trend, China's banking supervision has shifted from emphasizing regulatory compliance only to emphasizing both regulatory compliance and risk supervision. (BIS 2006, p. 186)
2. Clearly defined permissible activities for banks and control of the use of the word 'bank'. |
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An assessment conducted on banking supervision in China in 2004 indicated that the Chinese regulatory framework fully complies with the Basel Core Principles (BCPs) on 'licensing and structure'. The competences of the licensing authority are stated in the Law of the People's Republic of China on Banking Regulation and Supervision (LoBRS), while the criteria for the establishment, restructuring, and termination of banking institutions is laid out in the LoCB and further regulations. (Brehm & Macht 2004, p. 319)
In China, the licensing authority is the China Banking Regulatory Commission (CBRC). Without permission of the CBRC, no institution or individual may establish a banking institution or engage in banking business. But, except for reviewing the ownership structure as well as conducting fit and proper tests for directors and senior directors, the LoBRS includes no explicit licensing criteria. (Brehm & Macht 2004, p. 319)
According to LoBRS, the term 'banking institutions' means financial institutions established in the People's Republic of China that take deposits from the general public, including, among others, commercial banks, urban credit cooperatives and rural credit cooperatives, and policy banks. (LoBRS 2003)
The LoBRS also does not include any fiat which allows the CBRC to set criteria for the establishment of a banking institution. Hence the CBRC has to decide according to Chapter II of the Law of the People's Republic of China on Commercial Banks (LoCB), which mentions explicit rules for the establishment of a commercial bank and of a bank branch. (Brehm & Macht 2004, p. 319)
3. Criteria for structure, directors, operating plan, controls, financial condition and capital base. |
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An assessment conducted on banking supervision in China in 2004 indicated that the Chinese regulatory framework fully complies with the Basel Core Principles (BCPs) on 'licensing and structure'. The competences of the licensing authority are stated in the Law of the People's Republic of China on Banking Regulation and Supervision (LoBRS), while the criteria for the establishment, restructuring, and termination of banking institutions is laid out in the LoCB and further regulations. (Brehm & Macht 2004, p. 319)
The China Banking Regulatory Commission (CBRC) may approve or reject applications for the establishment, restructuring and termination of banking institutions. But, except for reviewing the ownership structure as well as conducting fit and proper tests for directors and senior directors, the LoBRS includes no explicit licensing criteria. (Brehm & Macht 2004, p. 319)
The LoBRS also does not include any fiat which allows the CBRC to set criteria for the establishment of a banking institution. Hence the CBRC has to decide according to Chapter II of the Law of the People's Republic of China on Commercial Banks (LoCB), which mentions explicit rules for the establishment of a commercial bank and of a bank branch. The essential application documents for establishing a banking institution mentioned in the LoCB address the requirements of the Basel Core Principles: (1) operating plan, systems of control and internal organization; and (2) financial projections including capital. Apart from that, the BCP demand of prior approval from the home country supervisor when the proposed owner is a foreign bank. This issue is dealt with in Art. 6-8 of the State Council's Regulations of the People's Republic of China on the Administration of Foreign-funded Financial Institutions. (Brehm & Macht 2004, p. 319)
4. Authority to review and reject transfer of ownership. |
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An assessment conducted on banking supervision in China in 2004 indicated that the Chinese regulatory framework fully complies with the Basel Core Principles (BCPs) on 'licensing and structure'. The competences of the licensing authority are stated in the Law of the People's Republic of China on Banking Regulation and Supervision (LoBRS), while the criteria for the establishment, restructuring, and termination of banking institutions is laid out in the LoCB and further regulations. (Brehm & Macht 2004, p. 319)
Art. 17 of LoBRS states that "changes in the shareholders that hold a certain percentage or more of the total capital" have to be approved by the CBRC, which is in line with the BCP. The "certain percentage" is stipulated in Art. 24 of the LoCB and has been lowered from 10% to 5%. (Brehm and Macht 2004, p. 319)
5. Authority to review major acquisitions and investments. |
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An assessment conducted on banking supervision in China in 2004 indicated that the Chinese regulatory framework fully complies with the Basel Core Principles (BCPs) on 'licensing and structure'. The competences of the licensing authority are stated in the Law of the People's Republic of China on Banking Regulation and Supervision (LoBRS), while the criteria for the establishment, restructuring, and termination of banking institutions is laid out in the Law of the People's Republic of China on Commercial Banks (LoCB) and further regulations. (Brehm & Macht 2004, p. 319)
BCP 5 requires the approval of the supervisory body for 'major acquisitions or investments' by a bank. This is not mentioned in the LoBRS, but it is in Art. 25 of the LoCB. (Brehm & Macht 2004, p. 319)
6. Minimum capital adequacy requirements (meet Basle Capital Accord for internationally active banks). |
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An assessment conducted on banking supervision in China in 2004 indicated that the rules concerning prudential regulations in China only supply a basic general guidance and leave out detailed criteria, clear quality standards and explicit time limits for their implementation. (Brehm & Macht 2004, p. 320) However there is no information publicly available regarding China's level of compliance with this Principle.
The China Banking Regulatory Commission (CBRC) has made progress in improving bank supervision, but more effort is required. Substantial improvements in banking regulation have been made in recent years, including in the critical areas of asset classification and provisioning and capital adequacy. The new capital adequacy requirements, which require banks to fully provision for their nonperforming loans and maintain at least 8 percent of aggregate capital adequacy, were adopted in 2004 and will become fully binding as of 2007. Strengthening capital adequacy requirements was a major step in creating a standard regulatory environment, but it will be a major test for the CBRC to ensure that all banks achieve compliance and that no precedent of forbearance is created. However, according to a 2006 report by the Bank for International Settlements (BIS), the capital adequacy ratio of some Chinese banks is relatively low, lower than the 8% ratio set by the Basel Capital Accord. (IMF 2006, p. 19; BIS 2006, p. 185)
The Law of the People's Republic of China on Banking Regulation and Supervision (LoBRS) states that prudential rules and regulations may be stipulated in laws or administrative regulations formulated by the CBRC in accordance with applicable laws and administrative regulations. The term 'prudential rules and regulations' as it is used in the LoBRS, covers among others risk management, internal controls, capital adequacy, asset quality, loan loss provisioning, risk concentrations, connected transactions and liquidity management (Art. 21 LoBRS). This addresses many of the Basel Core Principles, but without providing a statement of implementation or quality requirements. However, these issues are regulated in separate provisions. (Brehm & Macht 2004, pp. 319-320)
Although the level of 8% is clearly defined as the minimum level of the banks' capital adequacy ratio in Art. 39 of the Law on the People's Bank of China from 1995, the laws and regulations have left various loopholes and do not provide guidance on supervisory actions to address the many under-capitalized banks. The lack of clearly stated corrective action possibilities weakens effective supervision and damages its authority. The Regulation Governing Capital Adequacy of Commercial Banks, called the New Capital Rules (NCR), fills this gap. Prima facie, the NCR show many similarities to Basel I. Notably the new regulations require coverage of market risk, which up to now is done only in few countries. Consistency can also be found in the fundamentals: The target capital adequacy ratio of 8% is manifested in Art. 7 NCR, together with the requirement of at least 4% core capital. The formula to calculate the adequacy ratio is the same, with only the definitions of the capital elements being marginally softer than the Basel requirements. Basel I puts the deduction of holdings of other banks' capital at national discretion. The PRC does not choose this option. Rather, Art. 14 NCR demands deductions for equity investment in unconsolidated financial institutions. This is an important measure as it hampers potential systemic dangers for the banking system due to such double leveraging after the privatization of some Chinese banks. (Brehm & Macht 2004, pp. 322-323)
Apart from a general low capital adequacy ratio, another concern of the Chinese financial system is the misallocation of capital due to lending policies stamped by technical deficiency, malpractice, cronyism and political influence. (Brehm & Macht 2004, p. 320)
Strengthening capital adequacy requirements was a major step in creating a standard regulatory environment, but it will be a major test for the CBRC to ensure that all banks achieve compliance and that no precedent of forbearance is created. At end-2004, 30 banks accounting for 48 percent of commercial bank assets were in compliance and the total shortfall in provisioning stood at Chinese Yuan (RMB) 960 billion ($116 billion). (IMF 2006, pp. 3, 19)
7. A method exists for the evaluation of procedures related to loans, investments and portfolio management. |
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An assessment conducted on banking supervision in China in 2004 indicated that the rules concerning prudential regulations in China only supply a basic general guidance and leave out detailed criteria, clear quality standards and explicit time limits for their implementation. (Brehm & Macht 2004, p. 320) However there is no information publicly available regarding China's level of compliance with this Principle.
The Law of the People's Republic of China on Banking Regulation and Supervision (LoBRS) states that prudential rules and regulations may be stipulated in laws or administrative regulations formulated by the China Banking Regulatory Commission (CBRC) in accordance with applicable laws and administrative regulations. The term 'prudential rules and regulations' as it is used in the LoBRS, covers among others risk management, internal controls, capital adequacy, asset quality, loan loss provisioning, risk concentrations, connected transactions and liquidity management (Art. 21 LoBRS). This addresses many of the Basel Core Principles, but without providing a statement of implementation or quality requirements. However, these issues are regulated in separate provisions. (Brehm & Macht 2004, pp. 319-320)
Based on the requirements of this principle it is necessary to implement a management information system which provides essential details on the condition of the loan portfolio, including internal loan grading and classifications, in order to control banks' credit risk. Although this topic is not mentioned in the Law of the People's Republic of China on Banking Regulation and Supervision (LoBRS), the Chinese government has been dealing with it since 1998. (Brehm & Macht 2004, p. 320)
According to a 2006 report by the Bank for International Settlements (BIS), CBRC has introduced a five-category classification of loans, the CAMEL rating system and other prudential regulations. (BIS 2006, p. 186)
8. Policies, practices and procedures for evaluating the quality of assets and the adequacy of loan loss provisions and reserves. |
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An assessment conducted on banking supervision in China in 2004 indicated that the rules concerning prudential regulations in China only supply a basic general guidance and leave out detailed criteria, clear quality standards and explicit time limits for their implementation. (Brehm & Macht 2004, p. 320) However there is no information publicly available regarding China's level of compliance with this Principle.
The Law of the People's Republic of China on Banking Regulation and Supervision (LoBRS) states that prudential rules and regulations may be stipulated in laws or administrative regulations formulated by the China Banking Regulatory Commission (CBRC) in accordance with applicable laws and administrative regulations. The term 'prudential rules and regulations' as it is used in the LoBRS, covers among others risk management, internal controls, capital adequacy, asset quality, loan loss provisioning, risk concentrations, connected transactions and liquidity management (Art. 21 LoBRS). This addresses many of the Basel Core Principles, but without providing a statement of implementation or quality requirements. However, these issues are regulated in separate provisions. (Brehm & Macht 2004, pp. 319-320)
Aimed at lowering the risk of bank failure due to non-performing loans (NPLs), the People's Bank of China (PBC) formulated the Guidance for the Calculation of Loan Loss Provisions, which addresses adequate policies, practices and procedures for evaluating the quality of assets and the adequacy of loan loss provisions and loan loss reserves. The Guidance for Implementing a Unified Lending System of Commercial Banks should mitigate a high risk concentration. In addition, the Guidance for Internal Control of Commercial Banks (GICCB) deals with various Basel Core Principles in more detail. (Brehm & Macht 2004, p. 320)
According to a 2006 report by the Bank for International Settlements (BIS), CBRC has introduced a five-category classification of loans, the CAMEL rating system and other prudential regulations. (BIS 2006, p. 186)
According to the 2006 BIS report, loan provision gaps still exist, and some banks do not have enough provisions to keep up with the rapid increase in lending. Credit risk arising from NPLs and loan concentration is the major risk to the banking sector. There are several problems that require further action. First, the share of indirect (bank) financing is too high and concentrates credit risks in the banking sector. Measures have been taken to increase direct financing by developing the equity and bond markets. Second, the financing relations between the banks and enterprises need to be further improved. As the major bank customers, if enterprises could improve profitability, debt repayment capacity, asset quality and credibility and reduce defaults after reforms, they could help the banks to lower their NPL ratios. Third, the accounting system and taxation policy need to be improved to reflect the fact that the banks need to take enough provisioning to write off NPLs in order to mitigate risks. Fourth, markets where NPLs can be disposed of and risk products can be traded have yet to be established. These markets are essential for banks to identify, price and transfer risks, and to dispose of NPLs accumulated in the past. Fifth, the intermediaries, such as accounting firms, law firms, assessment agencies, rating agencies and credit reporting agencies, have yet to play the role they should have in providing professional services. More efforts should be made in fostering the development of these intermediaries. (BIS 2006, pp. 184-185)
The CBRC has made progress in improving bank supervision, but more effort is required. Substantial improvements in banking regulation have been made in recent years, including in the critical areas of asset classification and provisioning and capital adequacy. The new capital adequacy requirements, which require banks to fully provision for their nonperforming loans and maintain at least 8 percent of aggregate capital adequacy, were adopted in 2004 and will become fully binding as of 2007. Strengthening capital adequacy requirements was a major step in creating a standard regulatory environment, but it will be a major test for the CBRC to ensure that all banks achieve compliance and that no precedent of forbearance is created. (IMF 2006, p. 19)
9. Prudential limits and management information system on concentration of exposure. |
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An assessment conducted on banking supervision in China in 2004 indicated that the rules concerning prudential regulations in China only supply a basic general guidance and leave out detailed criteria, clear quality standards and explicit time limits for their implementation. (Brehm & Macht 2004, p. 320) However there is no information publicly
available regarding China's level of compliance with this Principle.
The Law of the People's Republic of China on Banking Regulation and Supervision (LoBRS) states that prudential rules and regulations may be stipulated in laws or administrative regulations formulated by the China Banking Regulatory Commission (CBRC) in accordance with applicable laws and administrative regulations. The term 'prudential rules and regulations' as it is used in the LoBRS, covers among others risk management, internal controls, capital adequacy, asset quality, loan loss provisioning, risk concentrations, connected transactions and liquidity management (Art. 21 LoBRS). This addresses many of the Basel Core Principles, but without providing a statement of implementation or quality requirements. However, these issues are regulated in separate provisions. (Brehm & Macht 2004, pp. 319-320)
10. Arm's length rule and monitoring for connected lending. |
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An assessment conducted on banking supervision in China in 2004 indicated that the rules concerning prudential regulations in China only supply a basic general guidance and leave out detailed criteria, clear quality standards and explicit time limits for their implementation. (Brehm & Macht 2004, p. 320) However there is no information publicly available regarding China's level of compliance with this Principle.
The Law of the People's Republic of China on Banking Regulation and Supervision (LoBRS) states that prudential rules and regulations may be stipulated in laws or administrative regulations formulated by the China Banking Regulatory Commission (CBRC) in accordance with applicable laws and administrative regulations. The term 'prudential rules and regulations' as it is used in the LoBRS, covers among others risk management, internal controls, capital adequacy, asset quality, loan loss provisioning, risk concentrations, connected transactions and liquidity management (Art. 21 LoBRS). This addresses many of the Basel Core Principles, but without providing a statement of implementation or quality requirements. However, these issues are regulated in separate provisions. (Brehm & Macht 2004, pp. 319-320)
In Art. 31 of the Guidance for Internal Control of Commercial Banks (GICCB), banks are required to set up an internal control system that ensures sound unified credit management and prevents abuses arising from connected lending. (Brehm & Macht 2004, p. 320)
According to a 2006 International Monetary Fund working paper, in 2004, the China Banking Regulatory Commission (CBRC) took steps to monitor large exposures and connected lending. (IMF 2006, p. 19)
11. Policies and procedures for country risk and transfer risk. |
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An assessment conducted on banking supervision in China in 2004 indicated that the rules concerning prudential regulations in China only supply a basic general guidance and leave out detailed criteria, clear quality standards and explicit time limits for their implementation. (Brehm & Macht 2004, p. 320) However there is no information publicly available regarding China's level of compliance with this Principle.
The Law of the People's Republic of China on Banking Regulation and Supervision (LoBRS) states that prudential rules and regulations may be stipulated in laws or administrative regulations formulated by the China Banking Regulatory Commission (CBRC) in accordance with applicable laws and administrative regulations. The term 'prudential rules and regulations' as it is used in the LoBRS, covers among others risk management, internal controls, capital adequacy, asset quality, loan loss provisioning, risk concentrations, connected transactions and liquidity management (Art. 21 LoBRS). This addresses many of the Basel Core Principles, but without providing a statement of implementation or quality requirements. However, these issues are regulated in separate provisions. (Brehm & Macht 2004, pp. 319-320)
Risk management is mentioned in several regulations. The New Capital Rules (NCR) deal with the calculation of various risks (credit risk, country and transfer risk, market risk, interest rate risk, liquidity risk, but not operational risk). According to Art. 10 of the Guidance for Internal Control of Commercial Banks (GICCB), banks have to establish a management system, procedures and methods helping to recognize, measure, as well as control, risks. They also need to deal with off-balance-sheet risks, and furthermore, banks need to make their situation regarding credit risk, liquidity risk, market risk, operational risk and other risks public. (Brehm & Macht 2004, p. 320)
12. Measuring and monitoring market risk. Limit and/or specific capital charge on market risk exposure. |
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An assessment conducted on banking supervision in China in 2004 indicated that the rules concerning prudential regulations in China only supply a basic general guidance and leave out detailed criteria, clear quality standards and explicit time limits for their implementation. (Brehm & Macht 2004, p. 320) However there is no information publicly available regarding China's level of compliance with this Principle.
The Law of the People's Republic of China on Banking Regulation and Supervision (LoBRS) states that prudential rules and regulations may be stipulated in laws or administrative regulations formulated by the China Banking Regulatory Commission (CBRC) in accordance with applicable laws and administrative regulations. The term 'prudential rules and regulations' as it is used in the LoBRS, covers among others risk management, internal controls, capital adequacy, asset quality, loan loss provisioning, risk concentrations, connected transactions and liquidity management (Art. 21 LoBRS). This addresses many of the Basel Core Principles, but without providing a statement of implementation or quality requirements. However, these issues are regulated in separate provisions. (Brehm & Macht 2004, pp. 319-320)
Risk management is mentioned in several regulations. The New Capital Rules (NCR) deal with the calculation of various risks (credit risk, country and transfer risk, market risk, interest rate risk, liquidity risk, but not operational risk). According to Art. 10 of Guidance for Internal Control of Commercial Banks (GICCB), banks have to establish a management system, procedures and methods helping to recognize, measure, as well as control, risks. They also need to deal with off-balance-sheet risks, and furthermore, banks need to make their situation regarding credit risk, liquidity risk, market risk, operational risk and other risks public. (Brehm & Macht 2004, p. 320)
Market risk is incorporated in the NCR. The implementation of market risk is comparable to the amendment to Basel I to incorporate market risk in 1996, which is also part of the Basel II framework.(Brehm & Macht 2004, p. 326)
13. Comprehensive risk management processes. |
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An assessment conducted on banking supervision in China in 2004 indicated that the rules concerning prudential regulations in China only supply a basic general guidance and leave out detailed criteria, clear quality standards and explicit time limits for their implementation. (Brehm & Macht 2004, p. 320) However there is no information publicly available regarding China's level of compliance with this Principle.
The Law of the People's Republic of China on Banking Regulation and Supervision (LoBRS) states that prudential rules and regulations may be stipulated in laws or administrative regulations formulated by the China Banking Regulatory Commission (CBRC) in accordance with applicable laws and administrative regulations. The term 'prudential rules and regulations' as it is used in the LoBRS, covers among others risk management, internal controls, capital adequacy, asset quality, loan loss provisioning, risk concentrations, connected transactions and liquidity management (Art. 21 LoBRS). This addresses many of the Basel Core Principles, but without providing a statement of implementation or quality requirements. However, these issues are regulated in separate provisions. (Brehm & Macht 2004, pp. 319-320)
Risk management is mentioned in several regulations. The New Capital Rules (NCR) deal with the calculation of various risks (credit risk, country and transfer risk, market risk, interest rate risk, liquidity risk, but not operational risk). Due to Art. 10 of the Guidance for Internal Control of Commercial Banks (GICCB), banks have to establish a management system, procedures and methods helping to recognize, measure, as well as control, risks. They also need to deal with off-balance-sheet risks, and furthermore, banks need to make their situation regarding credit risk, liquidity risk, market risk, operational risk and other risks public. (Brehm & Macht 2004, p. 320)
However, the NCR fails to consider operational risk. According to a 2006 report by the Bank for International Settlements (BIS), since many layers of agent and owner relationship exist between bank creditors and share-holders in China, share-holders and management, as well as between different levels of management, operational risk may easily arise due to malfunctioning of corporate governance and inadequate internal control mechanisms. (Brehm & Macht 2004, p. 326; BIS 2006, p. 184)
The mismatch of the Chinese Yuan (RMB) deposit and lending maturities has been an outstanding weakness. By the end of 2004, the ratio of mid- and long-term lending to mid-/long-term deposits had risen to 135.4%, 35.4 percentage points higher than the required ratio, reflecting the fact that large amounts of short-term deposits are used for mid- and long-term lending. In addition, over half of the working capital lending is put to uses other than the intended use. Thus potential liquidity risks deserve due attention. (BIS 2006, p. 184)
According to a 2006 report by the Bank for International Settlements (BIS), as China is undergoing interest rate reform, the risks faced by the banking system require special attention. Significant progress has been made in interest rate reform since 2004. The lending rate ceiling and deposit rate floor have been removed and the bands for floating rates widened. However, reform is still in progress here. If the banks cannot charge different lending rates to enterprises with different risk profiles, they may not be able to cover losses, nor can they appropriately price their fee-based services and deposit products. On the other hand, as the banks rely mainly on the interest spread for income, interest rate fluctuations may impact their profitability. They have to put in more effort to develop fee-based businesses and raise the related income share to mitigate the impact of price fluctuations in the market. At the same time, they should pay more attention to macroeconomic research in order to adjust business strategies accordingly to avoid losses. (BIS 2006, p. 184)
Furthermore, the greatest concern in banking operations is sharp ups and downs in the economy. In a boom, the banking sector usually performs well, with high profits and improved asset quality. Recent years have seen the reduction of non-performing loans (NPLs) at an annual rate of 3-5 percentage points due to the economic upturn. However, in the event of a recession, NPLs might mushroom. This can be proved by the drastic change in NPLs in Thailand, Korea and Singapore before and after the Asian financial crisis. When a financial crisis happens, the economy slows down and as a result, the NPL ratio usually rises substantially. The Chinese government should make efforts to control the economic cycles, to prevent the economy from undergoing sharp changes. From the macro-adjustment viewpoint, besides adopting appropriate monetary policy instruments at the right time to prevent sharp swings, asset bubbles deserve special attention and should be avoided if possible. (BIS 2006, p. 185)
According to a 2006 Bank for International Settlements report, a five-category classification of loans, the CAMEL rating system and other prudential regulations have been introduced. Corporate governance and internal control mechanisms have become the focus of supervision. Offsite surveillance and onsite supervision complement each other in ongoing prudential supervision. A risk assessment system and an early warning mechanism have also been set up. (BIS 2006, p. 186)
14. Adequate internal controls. |
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An assessment conducted on banking supervision in China in 2004 indicated that the rules concerning prudential regulations in China only supply a basic general guidance and leave out detailed criteria, clear quality standards and explicit time limits for their implementation. (Brehm & Macht 2004, p. 320) However there is no information publicly available regarding China's level of compliance with this Principle.
The Law of the People's Republic of China on Banking Regulation and Supervision (LoBRS) states that prudential rules and regulations may be stipulated in laws or administrative regulations formulated by the China Banking Regulatory Commission (CBRC) in accordance with applicable laws and administrative regulations. The term 'prudential rules and regulations' as it is used in the LoBRS, covers among others risk management, internal controls, capital adequacy, asset quality, loan loss provisioning, risk concentrations, connected transactions and liquidity management (Art. 21 LoBRS). This addresses many of the Basel Core Principles, but without providing a statement of implementation or quality requirements. However, these issues are regulated in separate provisions. (Brehm & Macht 2004, pp. 319-320)
In Art. 31 of the Guidance for Internal Control of Commercial Banks (GICCB), banks are required to set up an internal control system that ensures sound unified credit management. (Brehm & Macht 2004, p. 320)
According to a 2006 Bank for International Settlements report, corporate governance and internal control mechanisms have become the focus of supervision. (BIS 2006, p. 186)
15. Strict "know-your-customer" rules and high ethical and professional standards. |
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An assessment conducted on banking supervision in China in 2004 indicated that the rules concerning prudential regulations in China only supply a basic general guidance and leave out detailed criteria, clear quality standards and explicit time limits for their implementation. (Brehm & Macht 2004, p. 320) However there is no information publicly available regarding China's level of compliance with this Principle.
The Law of the People's Republic of China on Banking Regulation and Supervision (LoBRS) states that prudential rules and regulations may be stipulated in laws or administrative regulations formulated by the China Banking Regulatory Commission (CBRC) in accordance with applicable laws and administrative regulations. The term 'prudential rules and regulations' as it is used in the LoBRS, covers among others risk management, internal controls, capital adequacy, asset quality, loan loss provisioning, risk concentrations, connected transactions and liquidity management (Art. 21 LoBRS). This addresses many of the Basel Core Principles, but without providing a statement of implementation or quality requirements. However, these issues are regulated in separate provisions. (Brehm & Macht 2004, pp. 319-320)
On October 31, 2006, the National People's Congress passed a new Anti-Money Laundering (AML) Law, which came into effect January 1, 2007. This new law broadens the scope of existing anti-money laundering regulations to include any institution involved in money laundering. It mandates that financial and some non financial institutions maintain records on accounts and transactions, and that they report large and suspicious transactions. The law more firmly establishes the Central Bank's authority over national anti-money laundering efforts. (U.S. DoS 2007)
The 2006 AML law requires financial institutions established in China to engage in anti-money laundering measures, such as a "comprehensive know your customer" system, "customer identification materials," "transaction recording system", "large value transaction and suspicious transaction" reporting systems. "Financial institutions" refers to policy banks, commercial banks, credit cooperative societies, postal savings institutions, trust companies, securities companies, futures brokerages, insurance companies and other entities that the regulatory authority in charge of anti-money laundering has designated. (Heller Ehrman LLP 2007, pp.1-2)
In 2006, China's central bank issued two new regulations, "Rules for Anti-Money Laundering by Financial Institutions," which came into effect January 1, 2007, and "Administrative Rules for Reporting of Large-Value and Suspicious Transactions by Financial Institutions," which came into effect March 1, 2007. Together, these regulations revise earlier People's Bank of China (PBC) regulations implemented in March, 2004. The new regulations will require all financial institutions - including securities, trust companies and futures dealers - to report large and suspicious transactions. Any cash deposit or withdrawal of over RMB 200,000 or foreign-currency withdrawal of $10,000 in one business day must be reported within five days if electronically or within 10 days in writing to the PBC. Money transfers between companies exceeding RMB 2 million or US$200,000 in one day or between an individual and a company greater than RMB 500,000 or US$100,000 must also be reported. The regulations are slated for implementation between January and March of 2007. (U.S. DoS 2007)
These regulations enhance a prior March 2004 PBC regulation entitled "Regulations on Anti-Money Laundering for Financial Institutions," which strengthens the regulatory framework under which Chinese banks and financial institutions must treat potentially illicit financial activity. The regulation effectively requires Chinese financial institutions to take responsibility for suspicious transactions, instructing them to create their own anti-money laundering mechanisms. Banks in particular were required to report suspicious foreign exchange transactions - but not all transactions, as in the new regulations - of more than $10,000 per person in a single transaction or cumulatively per day in cash, or noncash foreign exchange transactions of $100,000 per individual or $500,000 per entity either in a single transaction or cumulatively per day. Under the regulation, banks were further required to submit monthly reports to the PBC outlining suspicious activity and to retain transaction records for five years. Banks which failed to report on time can be fined up to the equivalent of approximately $3,600. Under the December 2006 regulations, financial institutions that fail to meet reporting requirements in a timely manner can have their licenses or business operations suspended. (U.S. DoS 2007)
16. Effective supervisory system consisting of on-site and off-site supervision. |
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An assessment conducted on banking supervision in China in 2004 indicated that the compliance of the Law of the People's Republic of China on Banking Regulation and Supervision (LoBRS) with the Basel Core Principles (BCPs) regarding ongoing supervision is strong. The law allows the China Banking Regulatory Commission (CBRC) for on-site and off-site examination and defines the measures it may take. (Brehm & Macht 2004, p. 321) However there is no information publicly available regarding China's level of compliance with this Principle.
Art. 34 LoBRS, describes in detail the measures of on-site examination, which the CBRC may take. Art. 23 LoBRS claims that the CBRC should conduct off-site surveillance. For this purpose, the CBRC will have to establish a supervisory information system for analyzing and assessing the risk profile of banking institutions (Art. 23 LoBRS). Furthermore, the Commission needs to set up a rating system and an early warning system which helps to decide the frequency and the scope of on-site examinations (Art. 27 LoBRS). Additionally, according to Art. 28 LoBRS the CBRC shall establish a system to identify and report emergency situations in the banking sector. (Brehm & Macht 2004, p. 321)
According to a 2006 International Monetary Fund working paper, in 2004, the CBRC also issued and revised a number of other regulations and took steps to strengthen on-site examinations. (IMF 2006, p. 19)
17. Regular contact with bank management and understanding of bank's operations. |
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An assessment conducted on banking supervision in China in 2004 indicated that the compliance of the Law of the People's Republic of China on Banking Regulation and Supervision (LoBRS) with the Basel Core Principles (BCPs) regarding ongoing supervision is strong. The law allows the China Banking Regulatory Commission (CBRC) for on-site and off-site examination and defines the measures it may take. (Brehm & Macht 2004, p. 321) However there is no information publicly available regarding China's level of compliance with this Principle.
According to Art. 35 of LoBRS, the CBRC may hold supervisory consultations with the directors and senior managers of a banking institution in order to inquire about the major activities concerning its business operations and risk management. This is in accordance with this Principle, which suggests regular contact of bank supervisors with bank management and thorough understanding of the institution's operations. (Brehm & Macht 2004, p. 321)
18. Analytical reports and statistical returns on solo and consolidated basis. |
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An assessment conducted on banking supervision in China in 2004 indicated that the compliance of the Law of the People's Republic of China on Banking Regulation and Supervision (LoBRS) with the Basel Core Principles (BCPs) regarding ongoing supervision is strong. (Brehm & Macht 2004, p. 321) However there is no information publicly available regarding China's level of compliance with this Principle.
The means of on-site and off-site examinations, as described in the LoBRS, are in line with the demands of this Principle, which calls for means of collecting, reviewing and analyzing prudential reports and statistical returns from banks. Yet, this Principle stipulate a review on a solo and consolidated basis, while the China Banking Regulatory Commission (CBRC) is required to regulate and supervise banking institutions on a consolidated basis only. (Brehm & Macht 2004, p. 321)
19. Independent validation of supervisory information through on-site examination or external auditors. |
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An assessment conducted on banking supervision in China in 2004 indicated that the compliance of the Law of the People's Republic of China on Banking Regulation and Supervision (LoBRS) with the Basel Core Principles (BCPs) regarding ongoing supervision is strong. The law allows the CBRC for on-site and off-site examination and defines the measures it may take. (Brehm & Macht 2004, p. 321) However there is no information publicly available regarding China's level of compliance with this Principle.
This Principle suggests creating means of independent validation for banking supervisors either through on-site examinations or use of external auditors. The Chinese law favors the former, since external auditing in China is susceptible to misreporting and fraud. Additionally on-site surveillance - if exercised by a supervisory body dominated by the state - may serve as an instrument of the Central Government to control and influence commercial banks activities and thereby mitigating the principal-agent problem of hidden action. Art. 34 LoBRS, describes in detail the measures of on-site examination, which the CBRC may take. (Brehm & Macht 2004, p. 321)
20. Ability to supervise on a consolidated basis. |
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An assessment conducted on banking supervision in China in 2004 indicated that the compliance of the Law of the People's Republic of China on Banking Regulation and Supervision (LoBRS) with the Basel Core Principles (BCPs) regarding ongoing supervision is strong. The law allows the CBRC for on-site and off-site examination and defines the measures it may take. (Brehm & Macht 2004, p. 321) However there is no information publicly available regarding China's level of compliance with this Principle.
According to the 2006 Global Survey by the Institute of International Banks (IIB), consolidated supervision in China is applied to bank subsidiaries, and affiliates of domestic and non-domestic financial groups and to unincorporated branches/agencies and affiliates of non-domestic financial groups. (IIB 2006, p. 11)
21. Consistent accounting policies and practices that provide a true and fair view of the financial condition of the bank. |
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An assessment conducted on banking supervision in China in 2004 indicated that the information requirements have improved with the Law of the People's Republic of China on Banking Regulation and Supervision (LoBRS) and have come closer to international standards. But the quality and trustworthiness - and therefore compliance to this Principle - will have to be strengthened. (Brehm & Macht 2004, p. 321)
Art. 33 and 36 LoBRS deal with the information issue. The China Banking Regulatory Commission (CBRC) has the authority to require banking institutions to submit balance sheets, income statements and other financial or statistical reports, information concerning business operations and management as well as audit reports prepared by certified public accountants (Art. 33 LoBRS). This is not fully consistent with this Principle, as the stipulation of the LoBRS focuses on the authority to require information, while the this Principle stress the quality of such information described as "adequate records drawn up in accordance with consistent accounting policies and practices that enable the supervisor to obtain a true and fair view of the financial condition of the bank and the profitability of its business". (Brehm & Macht 2004, pp. 321-322)
According to Art. 36 LoBRS, the CBRC has to ensure that banks disclose reliable information to the public. The concern about quality is not addressed in the LoBRS, but rather in the above mentioned NCR and the Interim Methods on Commercial Bank Disclosure, which deals with the content and frequency of financial reports. There, Art. 5 states that banks need to make information public in a truthful, precise and complete way according to laws and regulations, the national unified accounting system and the provision stipulated by the CBRC. One might not be very confident that this will be enough to get Chinese information requirements in line with the Basel Core Principles, since accounting and auditing standards, together with their enforcement are weak. (Brehm & Macht 2004, pp. 321-322)
22. Adequate supervisory measures to ensure timely corrective action. |
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An assessment conducted on banking supervision in China in 2004 indicated that the formal powers of the Chinese supervisory body are far reaching and seem to be fully consistent with this Principle. Chapter IV of the Law of the People's Republic of China on Banking Regulation and Supervision (LoBRS) responds to the Principle's stipulations on the formal power of supervisors. Whenever a bank fails to meet prudential rules and regulations, the China Banking Regulatory Commission (CBRC) may decide about remedial measures ranging from suspending part of the business (Art. 37 of LoBRS) to closing down the institution (Art. 39 of LoBRS). The power to intervene is also illustrated by Art. 36-41 of the New Capital Rules, where 'corrective actions' for banks failing to meet capital regulations are stated. (Brehm & Macht 2004, p. 322)
A five-category classification of loans, the CAMEL rating system and other prudential regulations have been introduced. A risk assessment system and an early warning mechanism have also been set up. (BIS 2006, p. 186)
23. Banking supervisors must practice global consolidated supervision over their internationally-active banking organizations. |
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An assessment conducted on banking supervision in China in 2004 indicated that on the whole, cross-border banking requirements in the Law of the People's Republic of China on Banking Regulation and Supervision (LoBRS) are consistent with those in this Principle. Art. 36 reflect the requirements of BCP 23. It stipulates that foreign institutions of Chinese commercial banks have to accept the supervision and examination conducted by the China Banking Regulatory Commission (CBRC). However, the requirement of global consolidated supervision cannot be found in the LoBRS but is regulated in the Guidance on Supervision of Foreign Institutions of Commercial Banks. (Brehm & Macht 2004, p. 322)
According to the 2006 Global Survey by the Institute of International Banks (IIB), consolidated supervision in China is applied to bank subsidiaries, and affiliates of domestic and non-domestic financial groups and to unincorporated branches/agencies and affiliates of non-domestic financial groups. (IIB 2006, p. 11)
24. International exchange of information with other supervisors. |
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An assessment conducted on banking supervision in China in 2004 indicated that according to Art. 32 of Law of the People's Republic of China on Banking Regulation and Supervision (LoBRS), the China Banking Regulatory Commission (CBRC) may engage in international activities related to banking regulation and supervision. This builds the legal basis for international cooperation as is stipulated in Basel Core Principle 24. A problem may arise from the non-obligatory character of Art. 32, which could lead to low international cooperation - if the CBRC is not disposed to share information about domestic banks with foreign supervisory bodies due to political reasons. (Brehm & Macht 2004, p. 322) However there is no information publicly available regarding China's level of compliance with this Principle.
25. Supervision of local operation of foreign banks and information sharing with home country supervisors. |
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An assessment conducted on banking supervision in China in 2004 indicated that on the whole, cross-border banking requirements in the Law of the People's Republic of China on Banking Regulation and Supervision (LoBRS) are consistent with those in the in this Principle. The Provisions on Consolidated Supervision of Foreign Banks ensure equal treatment of foreign and domestic banks with respect to supervision. This is in line with Basel Core Principle 25. (Brehm and Macht 2004, p. 322)
According to the 2006 Global Survey by the Institute of International Banks (IIB), China applies it supervisory standards apart from the standards of the home country of the foreign banks. (IIB 2006, p. 13)
China's banking authorities on March 8, 2004 published a new supervisory regulation for foreign banks in a bid to get a more comprehensive picture of their growing operations as well as risk levels. Starting April 2004, foreign banks are required to provide consolidated operation reports of their Chinese branches twice a year to the bank regulator, the China Banking Regulatory Commission (CBRC). (IIB 2004, p. 58)
China has also issued regulations on foreign loans from foreign capital banks within China. The new regulations stipulate that the money borrowed from outside China by foreign capital banks is considered foreign loans, while the money borrowed from finance institutes in China is seen as spot exchange that can not be settled. (IIB 2004, p. 58)
China