China's banks get new risk management rules
BEIJING - China's bank regulator has started the year by issuing two new risk management and internal control regulations aimed at strengthening the defences of the - in many cases - bad-debt-encumbered commercial banks, and introducing international best practices into them.
One of the regulations, set to come into force on February 1, deals with the assessment of commercial banks' internal controls. Announcing the new regulation, the China Banking Regulatory Commission (CBRC) said that compared with internationally-advanced banks, China's commercial banks are lagging far behind in the area of risk management and internal control. The occurrence of a series of major financial crimes in domestic banks in recent years shows that there are still major flaws in the internal control system of these banks and that supervision is insufficient, according to a CBRC spokesman quoted in the China Daily.
Some banks lack an integrated internal control system, some lack proper policies and procedures for risk identification and evaluation, and some others fail to show incentives for correcting the deficiencies in their internal controls, the CBRC said. In promulgating the new regulation, the regulator has drawn on international best practice and taken into account "Chinese realities."
The regulation "stresses that internal controls represent a series of systematic and institutional arrangements and that a sound internal control system should be integrated, responsive and dynamic... It requires each commercial bank to put in place such a comprehensive and reliable internal control system," the CBRC said. Supervisors will be looking not only at control results, but the control process, it added.
This approach is based on the Framework for Internal Control Systems in Banking Organization designed by the Basel Committee, which effectively sets regulation for banks in the most developed countries, according to the report in the China Daily. The newspaper said the CBRC will thoroughly check on all the business activities, management and supporting systems of the domestic banks, including their headquarters and local branches, and give an assessment according to the new models.
"Regulators will adopt relevant measures to deal with the problems discovered in the internal control system of the banks, such as suspending certain business operations and even dismissing the responsible executives," the newspaper added.
Three of China's four state-owned commercial banks have received substantial injections of public money recently to help recapitalise them and prepare them for public floatation on a listed securities market. There are also around ten joint shareholding commercial banks in which the equity ownership is distributed between central government, local government and other investors. The quality of management among these banks is distinctly mixed.
The other new regulation issued by the CBRC concerns commercial banks' market risk management. Under this regulation, banks are required to fully identify, accurately measure, consistently monitor and appropriately control the market risks arising from their business and non-business activities. The purpose of the regulation is to ensure that commercial banks base their market risk-taking activities on both their market risk management capacity, and their capital strength, thereby operating on a safe and sound basis, says the CBRC.
With the deepening of China's bank reforms and its opening up, as well as advances in interest rate liberalisation, financial innovation and universal banking, China's banks are increasingly involved in the securities, foreign exchange, bullion and derivatives markets, and are, therefore, exposed to risk. The new regulation, which the CBRC refers to as guidelines, fill in a gap in the supervisory legal framework, it says.
Some 44 articles long, the main section of the guidelines is said to have been formulated with reference to the market risk regulation drawn up by the Basel Committee. Regulatory capital requirements for market risks are specified in the CBRC guidelines, which must be implemented by all commercial banks in China "within three to four years." State-owned and nation-wide joint-stock commercial banks are required to fully implement them by year-end 2007 at the latest, while for other commercial banks, including city commercial banks, the deadline is end 2008.
