Turning a New Page in Banking Regulation and Supervision in China:

On the basis of past experiences and in keeping pace with changing times

by Mr. Liu Mingkang

Chairman, China Banking Regulatory Commission

 

     In the spirit of the Sixteenth Plenary Session of the Chinese Communist Party and as approved by the First Session of the Tenth National People’s Congress, the China Banking Regulatory Commission (CBRC) has been established as a government agency under the State Council. The CBRC will make every effort, as required by the Chinese Communist Party Central Committee (CCPCC) and State Council, to improve banking regulation and supervision based on past experiences and in keeping with changing times, thereby turning a new page in banking supervision in China.

 

I.  Significant implications of the creation of the CBRC

Pursuant to the Decision on Institutional Restructuring of the Government Agencies under the State Council adopted by the First Session of the Tenth National People’s Congress, the State Council decided to set up the CBRC. The CCPCC and State Council made this decision based on assessment of the current circumstances of China’s financial sector and extensive deliberation and consultation with various parties. The creation of the CBRC is an important step in China’s economic reform and consistent with the requirements for developing a socialist market economy in China. It is also a significant initiative to deepen financial reform, strengthen financial supervision and improve the financial system, hence better positioning China’s financial industry in response to the challenges posed by the WTO entry. The financial sector plays a critical role in a modern economy. The establishment of an independent banking supervisory authority has significant implications for further deepening financial reform, improving financial supervision and mitigating financial risks, so as to maintain a safe, sound and efficient financial system in China. The establishment of the CBRC demonstrates that China’s financial sector has been opened up further to the outside world, while the financial supervisory regime has been brought closer to the international best practices.

 

II.       The CBRC’s major responsibilities and organizational structure

The CBRC has officially started its operation. As authorized by the State Council, the CBRC is responsible for the regulation and supervision of banks, asset management companies, trust and investment companies as well as other deposit-taking financial institutions. Its major responsibilities are as follows:

-           formulate supervisory rules and regulations for banking institutions;

-           authorize the establishment, changes, termination, branching and business scope of banking institutions;

-           conduct fit and proper tests for directors and senior managers;

-           conduct off-site surveillance and on-site examinations of banking institutions;

-           investigate, penalize and take enforcement actions on activities that violate relevant laws and regulations;

-           compile and publish statistics and reports of the overall banking sector in accordance with relevant regulations;

-           make proposals on the resolution of problem deposit-taking institutions in consultation with relevant authorities;

-           be responsible for the administration of the supervisory boards of the state-owned financial institutions; and

-           perform other responsibilities delegated by the State Council.

The CBRC comprises fifteen departments, namely the General Office, Supervisory Rule and Regulations Department (Research Bureau), Banking Supervision Department I, Banking Supervision Department II, Banking Supervision Department III, Non-Bank Financial Institutions Supervision Department, Cooperative Finance Supervision Department, Statistics Department, Treasury and Accounting Department, International Department, Staff Compliance Department, Human Resources Department, Publicity Department, Staff Union Department and Supervisory Boards Office. In addition, it has three functional centers, namely the Information Center, Training Center and Internal Service Center. The CBRC will set up local offices at provincial level, city level, and if necessary, county level.

 

III.     The CBRC at present

As required by the CCPCC and State Council, the creation of the CBRC has proceeded smoothly, which mainly involves the transfer of relevant responsibilities from the People’s Bank of China (PBC) to the CBRC and the restructuring of the Central Finance Working Committee. Three principles have been followed in this process. First, the staff members mostly move along with the relevant functional units. As a result, some departments will be transferred as a whole. Second, the organizational structure is designed prior to staffing, while the internal units are organized from top to bottom according to a unified plan. Third, normal supervisory work has proceeded smoothly in tandem with the formation of the CBRC. In this regard, we have been cooperating and coordinating closely with the PBC and other relevant government agencies. 

During the transitional period, the CBRC has to operate at two different locations. However, we will take effective measures while making the best use of information technology, so as to overcome any possible inconvenience and ensure the integrated and efficient operation of the CBRC.

 

IV.    Regulatory experiences and objectives as well as principles of good regulation

The four general experiences gained are as follows:

-           conducting consolidated supervision in order to assess, monitor and mitigate the overall risks of each banking institution as a legal entity;

-           staying focused on a risk-based supervisory approach while improving supervisory process and methods, so as to ensure the efficiency of banking supervision;

-           urging banking institutions to put in place and maintain a sound and effective system of internal controls; and

-           enhancing transparency in line with the international best practices.

The CBRC’s four regulatory objectives are as follows:

-           protection of the interests of depositors and consumers through prudential and effective supervision;

-           maintaining market confidence in the Chinese financial system through prudential and effective supervision;

-           promoting public awareness and understanding of the banking system and it’s reform through customer education and information disclosure; and

-           reducing financial crime.

To be an accountable regulator, we shall follow ‘six principles of good regulation’, which are:

-           to maintain financial stability while facilitating innovation;

-           to enhance the international competitiveness of China’s financial sector;

-           to ensure the regulatory restrictions are appropriate and reasonable while removing all the unnecessary controls;

-           to encourage and maintain fair competition while curbing disorderly competition;

-           to introduce an open, transparent and accountable mechanisms for both the institutions we supervise and ourselves; and

-           to use our resources in an efficient and economic way.

The CBRC will do its utmost to prevent the abuse of power while putting public interests before anything else in fulfilling its mandate.

V.       The CBRC’s supervisory priorities in the near future

In recent years, China has further improved its financial supervisory system, which has laid a sound foundation for enhancing the banking supervision. The priorities of banking supervision in the near future are, through chartering, regulating and supervision, to ensure our institutions to manage their risks better, to reduce the ratio of non-performing loans (NPLs), to ensure the state-owned commercial banks (SOCBs) to quicken their pace in reforms and to accelerate the reform of the rural credit cooperatives (RCCs).

(i)   Continue to urge commercial banks to reduce their NPL ratios to mitigate financial risks. Although the NPL ratios of the commercial banks have decreased in the past two years, they still stand at a high level. Reducing the risk level continues to be one of the priorities of banking supervision in China. Various legal, economic and administrative measures need to be taken to deal with the NPLs, hence maximizing NPL recovery and minimizing losses. Meanwhile, with adequate internal controls being established, the credit culture and policies, including risk management and measurement approaches of the commercial banks, should be improved in order to prevent the new NPLs and ensure a safe and sound portfolio that supports better performance.

(ii) Deepen the SOCBs reform. Efforts should be made to improve the governance of the SOCBs in order to compete effectively with other providers, offer products and services that meet the market needs, comply with applicable laws and provide fair access to financial services and fair treatment of their customers. Only by doing so, they can attract potential investors in the future and likely face the market to increase their capital. For other commercial banks, the overall corporate governance should also be advanced with restructuring being enhanced according to the requirements of establishing a modern enterprise.

(iii)   Accelerate the reform of the rural financial system. The role of rural finance in facilitating the development of the agricultural sector and rural areas should be brought into full play. The reform of the RCCs should be pushed ahead by clarifying ownership structure, improving internal controls and enhancing service quality. The RCCs should stay focused on agricultural needs, thereby providing timely support to farmers and facilitating structural adjustment in the agricultural sector and rural areas. In addition, measures should be taken to provide direction and guidance to the lending activities in the rural sector, so that risks involved can be duly controlled and managed.

 

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Copyright: China Banking Regulatory Commission
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