## cr17403 ## Source details **Canonical URL:** [cr17403](https://www.imf.org/-/media/files/publications/cr/2017/cr17403.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr17403.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr17403.pdf.json) --- ### Overview and key findings - CBRC has maintained momentum in regulation and supervision amid exceptional growth and complexity of the banking system; clarity of supervisory requirements and expectations is identified as a strength. - The CBRC has achieved a high degree of compliance with the Basel Core Principles (BCPs); further maturing needed to develop deeper diagnostic capabilities and forward-looking integrated risk analysis. - Urgent resource needs: - expand range and depth of specialist skills before industry developments impair oversight, notably of the four Global Systemically Important Banks (GSIBs). - develop a detailed forward strategy for supervision covering three to five years to support resourcing requests. - Supervision, data and methodologies: - extensive overhaul of reporting data and investment in analytical systems (REASS, EAST, ORMS). - supervisory expectations clearly communicated; broad use of on- and off-site methods; use of stress tests and ICAAP for large banks. - Key prudential gaps and concerns: - treatment of problem assets and loan classification allows collateral to influence NPL classification (loans >90 days past due can be “special mention” if good quality collateral present). - high regulatory limits—50 percent of Tier 1 capital—for interbank exposures and aggregate related party lending. - related party definition excludes related banks and does not treat state government ownership as an automatic trigger. - CBRC lacks direct power to reject external auditors. - Need for greater disclosure of aggregate statistics and risk indicators for the banking industry. ### Objectives, powers and legal framework (CP 1) - Legal mandate and objectives: - Primary objective: promote the safety and soundness of the banking industry and maintain public confidence (Banking Supervision Law, Article 3). - Subsidiary/developmental references exist (Commercial Bank Law, Art 1; Article 34 Commercial Bank Law references loans in line with national economy and social development). - Powers and tools: - CBRC empowered to license, supervise on a consolidated basis (Article 25), require supervisory returns (Article 33), conduct on-site examinations (Article 34) and impose corrective measures (Article 37). - Assessment conclusion: Principle 1 — Compliant. - Recommended legal amendments: - eliminate developmental objectives from the Commercial Bank Law; - amend Banking Supervision Law to explicitly grant access to de facto parents and affiliates; - ensure CBRC consistently communicates primacy of safety and soundness. ### Institutional independence, accountability and resourcing (CP2 / Principle 2) - Legal vs operational independence: - Legal safeguards present (Banking Supervision Law Article 5) but operational independence constrained: CBRC decisions can be overturned by the State Council; no legislative requirement to disclose reasons for dismissal of the CBRC Chair. - Resourcing and staffing: - Funding (2011–2015): CBRC funding increased from RMB 4.865 billion to RMB 5.165 billion (≈6 percent). - Staffing: approximately 24,000 staff (stable over period); staffing static despite banking sector growth from 288 to 1,053 banks and assets growth of 110 percent (end‑2010 to end‑2015). - Compensation increased from RMB 1.66 billion to RMB 2.401 billion (over 44 percent); average compensation up 42 percent. - Specialist skill counts as of end June 2016: 32 IT specialists and approximately a hundred risk specialists (60 credit risk specialists). - Assessment: Principle 2 — Materially Non Compliant. - Suggested actions: - increase headcount and specialist staffing (supervisory stress testing, GSIB supervision); - improve budgetary independence and salary scale recalibration; - develop a 3–5 year supervisory strategy to justify resources. ### Cooperation, consolidated supervision and home-host (CPs 3, 12, 13) - Domestic and cross-sector cooperation: - Legal framework and mechanisms (JMC, FCRG) in place; CBRC, PBC, MOF coordinate on systemic issues. - Participation in inter-agency MOUs and joint regulatory documents; CBRC and PBC AML Bureau conducting joint on-site examinations. - Consolidated supervision strengths and priorities: - CBRC applies consolidated supervision, issues Guidelines on Consolidated Management and Supervision; collects group data via supervisory returns and ORMS. - Priorities for development: - map groups including upward ownership to ultimate beneficial owners (UBO(s)); - strengthen powers for ex ante notification and approval of wider-group changes; - consider cross-sectoral contagion and reputational risks from WMPs and cross-product selling. - Home-host and cross-border: - CMGs established for each G-SIB; supervisory colleges for G-SIBs; MOUs with 63 jurisdictions (text also references 67 in some places). - Resolution planning done for G-SIBs; resolvability assessments conducted for three of four G-SIBs. ### Supervisory approach, techniques, reporting and corrective actions (CPs 8–11, Principles 9–11) - Supervisory model: - Risk-based approach using CAMELS+I; supervisory weighting example: capital adequacy 15 percent; asset quality 15 percent; quality of management 20 percent; profitability 10 percent; liquidity risk 20 percent; market risk 10 percent; IT risk 10 percent (adjustable by 5 percentage points). - REASS provides 25 leading indicators and 24 vulnerability indicators; EAST and ORMS used for verification and obligor monitoring. - On-site / off-site mix: - full-scope on-site examination at least once every five years (backstop). - 2015 on-site involvement: 2,142 supervisors in OSS on large banks; 2,260 supervisors in on-site examinations on large banks; on-site examinations of the 5 major banks accounted for 50 percent of total. - Corrective powers and usage: - CBRC uses a broad toolkit (suspend business lines; withhold approvals; restrict dividends; require shareholder action; replace board/senior management; take-over, facilitate restructuring or close bank). - 2015 empirical use: restricted dividends/payments in 105 banks; required shareholder transfers/restricted power in 21 cases; replaced directors/senior management in 50 cases; suspended business for rectification in 10 cases; withheld approval of new branches in 45 cases. - Assessment: - Principle 8 — Largely Compliant. - Principle 9 — Compliant. - Principle 10 — Compliant. - Principle 11 — Compliant. ### Diagnostic capabilities, supervisory judgment and data quality - Need to mature diagnostic skills: - integrate information across risk types to identify root causes and act preventively; supervisory judgment currently constrained by methodology. - next-generation risk methodologies should support integrated risk interactions and forward-looking analysis; allow greater supervisory discretion (recommendation to permit weight variation by more than five percent under senior approval for diverse banking models). - Supervisory data quality: - philosophy: supervisory data is a fundamental pillar. - overhaul of reporting (tables G01, G11, G12, G14, G15, G21–G25, G31, G40, G44 etc.); submission frequencies: monthly, quarterly, semi-annually with specified deadlines (quarterly first batch within 13 days; second batch within 18 days). - data governance: presidents sign OSS key indicators; locking mechanism for supervisory returns; unlocking requires application and explanation. - Assessment: data quality generally accurate and greatly improved. ### Credit risk, loan classification, problem assets and provisioning (Principles 17–18) - Credit risk management: - comprehensive legal/regulatory framework (Comprehensive Risk Management Guidelines, Due Diligence Guidelines, Notice on Further Enhancing Credit Risk Management). - CBRC intensified offsite surveillance, onsite examinations and risk alerts targeting non-standard activities. - Loan classification and provisioning issues: - Loan categories: normal, special mention, substandard, doubtful, loss; NPL definitions include substandard/doubtful/loss. - Provisioning minima (Guidelines on Loan Loss Provisioning): - Pass: 1% - Special Mention: 2% - Substandard: 25% - Doubtful: 50% - Loss: 100% - Rules set minimum loan provision at 2.5% and minimum provision coverage ratio at 150%. - Specific recommendations and concerns: - review allowance permitting loans >90 days past due to be classified as “special mention” if supported by collateral (CBRC estimates loans >90 dpd but classified as Special Mention are about 0.4% of total loans). - review requirement permitting small enterprise loans to be classified as NPL only when >180 days past due. - Time series (2011–2016) of asset quality and coverage: - Special Mention: 2011 3.13% | 2012 2.92% | 2013 2.44% | 2014 3.11% | 2015 3.79% | 2016 3.87% - NPL: 2011 0.96% | 2012 0.95% | 2013 1.00% | 2014 1.25% | 2015 1.67% | 2016 1.74% - Provision Coverage over NPL: 2011 278% | 2012 296% | 2013 283% | 2014 232% | 2015 181% | 2016 176% - 2016 NPL ratio and provision coverage by bank type: - Large Commercial Banks: NPL ratio 1.68% | Provision Coverage 163% - Joint-stock Commercial Banks: NPL ratio 1.74% | Provision Coverage 170% - City Commercial Banks: NPL ratio 1.48% | Provision Coverage 220% - Rural Commercial Banks: NPL ratio 2.49% | Provision Coverage 199% - Foreign banks: NPL ratio 0.93% | Provision Coverage 250% - Assessment: - Principle 17 — Largely Compliant. - Principle 18 — Largely Compliant. ### Large exposures, concentration risk and related parties (Principles 19–20) - Large exposures and concentration: - Board approval required for exposures to corporate borrower group >10% of capital and to single borrower >5% of capital. - Commercial Bank Law: single borrower outstanding loans not exceed 10% of bank capital; corporate group limit 15% of capital. - Interbank exposures: current regulatory limit 50 percent of Tier 1 capital for exposures to a single incorporated financial institution; aggregate interbank borrowings limit one-third of total liabilities. - Recommendation: review and reduce interbank exposure limit to 25% of Tier 1 capital and consider 15% of Tier 1 capital for G-SIB exposures to another G-SIB to align with BCBS large exposures framework. - Related parties: - Definition comprehensive but excludes related banks; ownership by state government not treated as trigger. - Exposure limits: - single related party exposures shall not exceed 10% of capital; - exposures to a corporate group with a related legal person shall not exceed 15% of capital; - aggregate exposures to all related parties shall not exceed 50% of capital (CBRC can reduce these limits). - Recommendation: review exclusions and treat entities with common local government ownership under enhanced due diligence and limits; consider lowering aggregate related-party limit below 50% of capital. ### Capital regime, ICAAP and supervisory review (Principle 16) - Basel III adoption and national calibration: - CET1 minimum requirement: not less than 5 percent (compared to 4.5 percent in Basel III). - Tier 1 ratio minimum: no less than 6 percent. - Total CAR minimum: no less than 8 percent. - Capital conservation buffer: 2.5 percent (Common Equity). - Countercyclical buffer: 0-2.5 percent (Common Equity). - SIB surcharge: 1 percent (Common Equity). - Leverage ratio requirement: 4 percent (Basel III: 3 percent). - Key summary statistics (end-2015, in practice): - Average CAR: 13.45 percent. - CET1 CAR: 10.91 percent. - Average leverage ratio: 6.33 percent. - Use of advanced approaches: - Six banks approved to implement advanced approaches for credit and market risk; CBRC maintains specialist team (~60 core members) for oversight. - Supervisory review / Pillar II: - CBRC can impose Pillar II add-ons based on ICAAP and supervisory review; Pillar II add-ons mainly used for largest banks to date. - Assessment: - Principle 16 — Compliant. - Recommendation: extend ICAAP and supervisory rigor proportionately to mid-sized banks. ### Market risk, IRRBB, liquidity and operational risk (Principles 22–25) - Market risk: - Market risk RWA around 1 percent of total RWA since 2013. - Five banks approved to use internal models for market risk. - Complex transactions (correlation trading, re-securitization, synthetic products) not permitted. - Assessment: Principle 22 — Compliant. - Interest rate risk in the banking book (IRRBB): - Phased interest rate liberalization; CBRC pilot scenarios (e.g., 250 and 300 basis point shifts and twists). - Banks required to report net interest income and economic value sensitivity (200 basis point parallel shock) in supervisory returns. - Assessment: Principle 23 — Compliant. - Liquidity risk: - All banks with at least RMB200bn total assets subject to LCR (represents about 90 percent of banking system assets). - Liquidity ratio minimum: 25 percent (applies to all banks). - Liquidity rules require contingency plans, stress tests (minimum 30-day horizon under market-wide systemic shock), HQLA holdings and MIS capabilities. - supervisory focus on lower-tier banks increasingly dependent on wholesale funding and WMPs. - Assessment: Principle 24 — Compliant. - Operational risk: - CBRC does not permit advanced modelling approaches for operational risk capital; strong emphasis on business continuity and IT practices. - Operational risk supervision includes RCSA, KRIs, loss data collection; internal audit minimum: internal auditors at least 1% of total headcount. - Recommendation: use revised Basel operational risk standard to encourage development beyond basic indicator approaches. ### Controls, audit, accounting, disclosure and transparency (Principles 26–28) - Internal control and audit: - Strong focus on three lines of defense; internal audit guidelines and rotation/independence rules for external auditors. - Limitation: CBRC lacks direct power to reject or rescind appointment of an external auditor deemed unfit. - Recommendation: grant CBRC formal power to reject external auditor appointments and increase audit oversight for small-to-medium banks. - Accounting and disclosures: - Accounting and auditing substantially in line with international standards; listed banks (~80% of system assets) generally appoint international accounting firms. - Recommendation: increase disclosure of aggregate statistics and risk indicators for the overall banking industry. ### Abuse of financial services and AML/CFT (CP29 / AML) - Developments: - AML JMC established; strong cooperation between PBC and CBRC at policy level. - Joint on-site examinations by CBRC and PBC AML Bureau initiated. - Gaps and recommendations: - broaden PEP definition to include domestic PEPs explicitly; - enhance requirements to identify ultimate beneficiaries of transactions; - reconsider calibration of fines under the AML Law and link repeat offences to additional CBRC measures. ### Crisis management, resolution, deposit insurance and recovery powers - CBRC statutory powers: - take over institutions experiencing or likely to experience credit crises (Banking Supervision Law Article 38); - close institutions for serious violations threatening financial order or public interests (Article 39); - apply to courts for bankruptcy, reorganization or liquidation per Commercial Bank Law and Enterprise Bankruptcy Law. - Crisis coordination: - mechanisms in place for information sharing with PBC, MOF; crisis actions coordinated via JMC; PBC provides liquidity support and Deposit Insurance Fund repays insured deposits per regulations. - Resolution and recovery: - Regulations on Resolving Bankruptcy Risk of Commercial Banks drafted and under revision referencing FSB Key Attributes. - CMGs formed for G-SIBs; RRPs required annually for G-SIBs and recommended to be extended to other domestic systemically important banks. - Deposit insurance: - Deposit insurance protection effective May 1, 2015; Deposit Insurance Fund established under PBC management. ### Reporting, confidentiality, MoUs and supervisory colleges - Supervisory returns: - extensive suite of returns (tables G01, G02, G03, G04, G06, G11, G12, G14, G15, G17, G18, G21–G25, G31, G40, G44 etc.); submission frequencies monthly/quarterly/semi-annual with specified deadlines. - Legal powers to require submissions: Banking Supervision Law Articles 33 and 25; Commercial Bank Law Article 61. - Confidentiality and information sharing: - Article 11 Banking Supervision Law requires confidentiality arrangements with foreign supervisors; CBRC has MoUs with 63 jurisdictions and participates in supervisory colleges for G-SIBs. - Gap: no procedure requiring CBRC to notify originating supervisor if legally compelled to disclose confidential information; recommendation to include notification procedures. - External cooperation: - CBRC has organized supervisory colleges, CMGs and signed MOUs; cross-border on-site examinations conducted (2 in 2016; 7 in 2015; 3 in 2014; 16 in 2013). ### Selected economy and banking system statistics (as provided) - Credit growth: averaged around 20 percent per year between 2009 and 2015. - Private credit to GDP: rose to over 200 percent. - Bank assets growth: 16 percent over the twelve months to September 2016. - New lending from policy banks: 13.8 percent of total new loans (17 percent in 2015). - Bank claims on nonbank financial institutions: around 11 percent of total bank assets by Q2 (up from 3 percent in 2011). - Wholesale funding ratio: doubled to 31 percent since 2011. - Deposits: account for 69 percent of banking sector liabilities. - Daily repos volume: RMB 1.4 trillion in December 2015. - Private P2P growth: from zero to $65 billion since 2012. - Foreign-owned banking institutions: 40 (end 2015); foreign equity into domestic banks permitted up to 20 percent per holding. - Profitability metrics (2016Q2): - Average regulatory capital ratio: 13.1 percent (11.1 Tier 1 capital). - ROA: 1.1 percent (down from 1.3 percent in 2013). - ROE: 15.2 percent (down from 19.2 percent in 2013). - Net open FX positions: around 3 percent of capital. - NPL ratio: 1.8 percent (up from 1 percent in 2013). - Sum of NPLs and special-mention loans: around 5½ percent of GDP. ### Priority recommendations (condensed) - Strengthen CBRC operational independence and budget/headcount autonomy; develop three- to five-year supervisory strategy to secure resources. - Expand specialist capabilities for GSIB supervision, supervisory stress testing, market risk, liquidity and IT/operational risk. - Enhance consolidated supervision: require ex ante notification/approval for wider-group ownership changes and access to ultimate beneficial owner information. - Review prudential rules: - loan classification rules permitting collateral-based downgrades for loans >90 dpd and 180 dpd threshold for small enterprise NPL classification; - reduce interbank exposure limit of 50 percent of Tier 1 capital (consider 25 percent) and set limits between G-SIBs (consider 15 percent); - revisit aggregate related-party exposure limit of 50% of capital and treat common local government ownership as a trigger for related-party discipline. - Give CBRC formal power to reject or rescind appointment of external auditors where necessary. - Improve disclosure: increase aggregate statistics and risk indicators for the banking industry. - Strengthen AML/CFT rules: include domestic PEPs, require ultimate beneficiary identification, recalibrate fines and link repeat offences to CBRC measures. - Continue to refine diagnostic methodologies to allow integrated, forward‑looking supervisory judgment and permit supervisors flexibility in rating methodologies. *Source: IMF Detailed Assessment extract (CR17403) — cr17403* ### INTRODUCTION ________________________________________________________________________________ 14 ### INTRODUCTION ________________________________________________________________________________ 14 ### Overview - The China Banking Regulatory Commission (CBRC) has maintained momentum in regulation and supervision amid exceptional growth in scale and increasing complexity of the banking system. - CBRC has risen to demands of the international regulatory reform agenda, delivering timely revisions to its body of regulations and maturing supervisory practices through investing in essential new skills, enhancing methodologies, and broadening interactions with the industry. - Clarity of supervisory requirements and expectations communicated to the industry is identified as a strength of the CBRC. - Recent organizational reforms, in 2015, building on other internal reforms, are expected to serve the CBRC well in delivering its supervisory mandate. - Concern: whether the CBRC would, in practice, always be able to act on its primary, stability, objective if government policies (focused growth and expansion, or social protection) conflicted with prudential considerations. ### Key findings (Summary and Key Findings paragraphs 1–4) - The CBRC has achieved a high degree of compliance with the Basel Core Principles for Effective Banking Supervision (BCPs); progress demonstrated in almost all areas despite the revision to the BCP methodology. - Further maturing is needed to develop deeper and more comprehensive diagnostic capabilities to facilitate early, effective and preventative actions. - It is essential the CBRC obtain resources to expand its range and depth of skills before developments in the industry leave it unable to maintain meaningful oversight, notably of the four Global Systemically Important Banks (GSIBs). - A detailed forward strategy for supervision, covering three to five years, would help the CBRC articulate its case for resources. - Widening of financial groups and cross sectoral activities present significant challenges to CBRC effectiveness: - Cooperation, coordination and detailed exchanges of information between authorities about financial groups and institutions have been lacking. - There is a tendency toward ex post information flow rather than routine ex ante sharing to identify emerging issues and act preventively. - These gaps have contributed to weaknesses in preventing abuses of financial services and weaker awareness of risks from complex groups and cross sectoral activities. - Gaps requiring attention in prudential standards and practices: - Treatment of problem assets, concentration risk and related party exposures lag international best practices in certain respects. - Current practice allows recognition of collateral in loan classification such that banks may classify loans over 90 days past due as “special mention” rather than “nonperforming” if good quality collateral is in place. - High regulatory limits—50 percent of Tier 1 capital—for interbank exposures and aggregate related party lending. - Corporate governance: need to rationalize various regulatory standards to remove overlaps or gaps and address divergences from global standards on independence issues for certain board committees. - CBRC should be granted formal power to reject the external auditor of a bank if needed. - Need for greater disclosure of aggregate statistics and risk indicators for the overall banking industry to facilitate better market understanding. ### Objectives, powers and responsibilities (CP 1) - Legal framework sets clear responsibilities and objectives for banking supervision in China. - CBRC’s legal mandate and responsibilities, supported by broad powers, enable CBRC to conduct banking supervision with a primary focus on safety and soundness. - Comprehensive regulations and procedures provide tools to operationalize the mandate; strong enforcement powers support effectiveness of supervisory actions. - CBRC takes into account national policy objectives for economic and social progress (which rely importantly on the provision of credit to the economy) aiming to balance safety and soundness with support for particular sectors. - Potential conflict: the use of the banking system, much of which is state owned, to achieve economic and social goals can make conflicts between safety/soundness and other objectives more acute. - Importance: CBRC communication must not mislead banks about CBRC’s first and foremost commitment to safety and soundness. ### Independence (CP2) - CBRC lacks operational independence which might impair its ability to execute its legal mandate. - Although there is a clear legal basis for independence and support from the State Council, CBRC is not operationally independent. - Factors undermining independence: - CBRC decisions can be overturned by the State Council. - No legislative requirement to disclose publicly the reasons for the dismissal of the Chair of the CBRC. - Concern: CBRC’s independence may be sufficiently compromised to question whether the supervisor would always act on the primary stability objective, particularly if government policies conflict with prudential considerations. - CBRC must ensure all offices exercise highest standards of independence and objectivity across its geographically large network. - Resource constraints: - CBRC has autonomy over neither staffing numbers nor organizational design. - Complement of staff has been static for a decade. - Key staff are increasingly attractive to and attracted by industry opportunities. - Budgetary independence, allowing increased resources in salary scale and staffing for specialist fields (including supervisory stress testing), is an urgent need. - Supervisory investment is cheaper than potential wide scale capital injection for banks under pressure. ### Cooperation, consolidated supervision and home-host (CPs 3, 12 and 13) - Cooperation and collaboration with local and foreign authorities are in place and enabled by legal and regulatory framework. - Arrangements appear to function as envisioned, but depth and breadth of data and information gathered from domestic supervisors should increase for effective consolidated supervision. - CBRC has broadened home-host relationships following expansion of Chinese banks operations abroad and classification of four Chinese banks as G-SIBs. - As Chinese banks expand further and groups increase in complexity, a more proactive approach may be needed. - Progress in consolidated supervision: - CBRC has focused on capacity development and is gaining experience and confidence in probing group wide risk management, activities and strategies. - Careful attention to related party transactions supports understanding of intra-group dynamics. - Priorities for further development include: - Focus on wider group and extended network of affiliates, including upward ownership to ultimate beneficial owners (UBO(s)). - Mapping of groups and affiliates to ensure effective supervision and keeping this information current. - Need for stronger powers of ex ante notification and approval of changes in the wider group to enable timely, preventative action. - Cross-sectoral activity and cross product selling (e.g., wealth management products (WMPs or other forms of collective investment schemes) by different financial sectors) introduce business, contagion and reputational risks that consolidated supervision must consider. - CBRC encouraged to continue applying conservative prudential standards to complement conduct requirements; cross sectoral agreements to limit arbitrage opportunities are welcomed. ### Permissible activities, licensing, transfer of ownership and major acquisitions (CPs 4 to 7) - Permissible activities are clearly defined and highly controlled through the licensing process. - Market entry legal framework and supporting procedures include powers to define and restrict types of business banks may engage in. - Approvals required for any new business line and branches; sound fit and proper criteria for board and senior management apply. - Non-banking activities are allowed on a case by case basis only, including fund management and insurance. - Banks’ investments in commercial enterprises and real estate not for use are not allowed. - In the past five years, new licenses have been provided mainly to convert rural cooperatives into banks, as well as for the establishment of foreign banks operations in China. - Evolving challenges: - Increasing sophistication and complexity of business groups and full implementation of procedures for entrance of newly established private banks require further efforts to understand wider groups. - Expansion of Chinese operations abroad and increased sophistication may require additional efforts to assess joint ventures and strategic investments. - Authorities should exercise caution when authorizing non-banking activities, ensuring robust regulatory frameworks govern such activities and their implications for banks and the banking system. - Control over transfer of significant ownership: - CBRC has a sound process for approvals of direct transfers of significant ownership above 5 percent. - Concepts of influence or indirect control have not been captured by the legal framework. - As the role of the state as a shareholder diminishes and shareholder interests increase in complexity, transfers of significant ownership and control through indirect holdings will remain outside CBRC purview. ### Supervisory approach, techniques, reporting and corrective actions (CPs 8 to 11) - CBRC plans and executes a high quality supervisory approach and continues developing its risk based approach since the last assessment. - Good processes in place for planning and executing both on-site and off-site supervisory activities. - Intensive investment since the last assessment in supervisory data quality, analytical systems, and refreshed analytical methodologies. - Supervisory expectations are clearly communicated to banks and followed up using meetings, notices and risk alerts for responsive feedback to the industry. - Effective use of broad sources of information; supervisory programs focused on emerging risks and trends such as: - Provision of wealth management products to clients. - Interbank/wholesale market activity. - Assessing resolvability of banks is work in progress: - Largest banks, identified as Global Systemically Important Banks (GSIBs), have been subject to resolvability assessments. - CBRC is still deliberating on the correct approach for domestic institutions. - CBRC has sound knowledge of banking groups in the system and notes relative lack of group complexity in most instances. *Source: INTRODUCTION ________________________________________________________________________________ 14 (cr17403)* ### 14. The CBRC needs to continue maturing its diagnostic skills in integrating information ### 14. The CBRC needs to continue maturing its diagnostic skills in integrating information ### Diagnostic capabilities and supervisory judgment - The CBRC needs to continue maturing its diagnostic skills in integrating information on different risks and events to identify root causes of issues in order to devise a more effective forward looking approach. - Although the CBRC has further enhanced its supervisory rating approach to permit a greater use of supervisory judgment, the leeway for this judgement is highly constrained and for some banking models might fail to reflect the nature of the risks in the banking institution. - The next generation of risk methodologies should: - address this deficiency; - provide further support to forward looking integrated risk analysis so that the interaction between risks can be even more carefully examined; and - help supervisors identify the potential for vulnerabilities and act before issues crystallize. - Continued development of the CBRC’s analytical techniques in relation to banks’ strategies and business models will provide a robust underpinning for greater supervisory discretion. ### Supervisory data quality and reporting - The CBRC philosophy is that the quality of supervisory data is a fundamental pillar of effective supervision. - CBRC has put extensive efforts into its supervisory reporting regime and enhancing the analytical systems that depend on it, including an almost wholescale overhaul of the reporting data. - Care is taken, using on and off-site methods, to: - ensure the data received is reliable; - ensure banks are accountable for the information they provide; and - ensure the CBRC continues to obtain the data that is most relevant for its evolving supervisory tasks. ### Early action and enforcement powers - CBRC demonstrates willingness to act at an early stage, supported by broad corrective powers. - The supervisory approach encompasses a robust early warning system, aiding early action. - CBRC counts with an extensive range of tools to enforce corrective action including penalties for the board, senior management and staff, which have been systematically used over the last few years. - Problem banks have been addressed primarily through restructuring. ### Corporate governance (CP 14) - There is clear supervisory emphasis on the effectiveness of corporate governance of banks; off-site surveillance and onsite examination consistently focus on internal governance structure, clear roles and responsibilities and decision-making processes within banks. - The regulatory framework for corporate governance of banks is based on a combination of various Guidelines and Listing Rules; it would be useful to: - rationalize and eliminate gaps or inconsistencies and have a single legislation as the focal point for supervisory corporate governance reviews in the future; - consider and clarify the criteria to implement corporate governance requirements in a proportionate manner across institutions with varying size and complexity. - Specific gaps and recommendations: - establish requirements to ensure the independence of risk management committee, and the nomination and remuneration committees of non-listed banks; - CBRC needs to closely monitor and adapt its governance frameworks and supervisory expectations, aligning to best practices, to ensure trust, transparency and accountability. ### Risk management, capital adequacy, and prudential framework (CPs 15 to 25) - Enterprise-wide risk management: - Banks have made good progress in management of individual risks, and for major banks ICAAP and stress tests have become important parts of risk management. - Supervisors perform more intensive review of ICAAP and stress tests annually for the large banks. - Full enterprise-wide risk approaches that integrate strategy setting, monitoring, management and stress testing in ways that consider interactions among risks are challenging, particularly for banks with business activities across geographical regions and diverse businesses and products. - Assessing whether banks are effective in adopting enterprise-wide risk approaches and capable of fully identifying, monitoring and managing risk interactions should continue to be a focus area of supervision. - Recovery and resolvability: - CBRC has required the four globally systemically important banks to prepare and submit recovery plans annually for review, with resolvability assessment being conducted for three. - A cross-border crisis management group (CMG) has been established for each G-SIB, comprising senior officials from national authorities including CBRC, MOF and PBC, as well as some foreign authorities. - CMG reviews and assesses the bank’s recovery and resolution plan (RRP) on an annual basis. - Recommendation: CBRC should extend RRP requirements to other large banks, in particular those assessed to be systemically important in the domestic market. - Capital regime: - China has set up a comprehensive and proportionate approach to its capital regime, proactively aligning it with international standards. - CBRC has fully adopted Basel III for all banks operating in China, with a few not material deviations setting higher requirements for CET1 and the leverage ratio. - Six banks have been allowed to implement the advanced approaches for credit and market risk and a few other banks are expected to be authorized in the near future. - CBRC has focused on ensuring a forward-looking approach to capital for large banks; in principle all banks are required to implement the ICAAP, but for middle size and small banks CBRC has focused on ensuring proper implementation of Pillar one and requiring mid-term capital planning. - Over the last few years CBRC has set informal expectations of dividends distribution around 30 percent in order to further increase banks’ reserves. ### Credit risk, loan classification, and guidance needs - Credit risk: - CBRC needs to continue focus on ensuring banks adopt a comprehensive approach towards identifying, monitoring and managing overall credit risks. - There has been an increase in the scale and complexity of banks’ credit risk origination activities, including investments in structured products, off-balance sheet activities and interbank investments. - CBRC has enhanced offsite surveillance of credit risk trends and vulnerabilities, intensified onsite examinations, and issued risk alerts and specific notices. - Recommendation: continue focus on ensuring banks implement and comply with recently issued guidelines targeted at emerging risks; develop comprehensive guidance on credit risk management in line with international standards to ensure supervisory expectations and minimum standards are well understood. - Loan classification: - CBRC has intensified supervision on banks’ loan classification to ensure accuracy and adequacy of provisions given rising trend in non-performing loans (NPL). - Recommendation: review current loan classification requirements that permit the use of collaterals in influencing NPL classification, as such practice makes it difficult to properly assess increase in credit risk and could potentially result in lower regulatory provisions. - Recommendation: review the requirement permitting loans granted to small enterprises to be classified as NPL only when they are more than 180 days-past-due to assess whether this practice results in slow downgrading and delays detection of increased credit risks in the micro-lending segment. ### Large exposures and related-party frameworks - Large exposures: - The supervisory framework to guard against large exposures needs to be strengthened. - CBRC has requirements for more comprehensive capture of concentration risks and banks are required to include significant risk concentrations in their stress testing programs. - Recommendation: further review and articulate the criterion in identifying relationships between entities with common local government ownership. - Recommendation: reduce the existing 50 percent (of Tier-1 capital) limit on interbank exposure and establish a limit on exposures between G-SIBs to avoid excessive risk concentrations. - Such a review would align with CBRC’s plans to move towards adopting Basel’s large exposures framework. - Related party exposures: - Gaps remain: while the definition of related party is comprehensive, it does not include related banks, and ownership by the state government is not treated as a trigger for related party reporting, limits or approvals. - Recommendation: review exclusions to ensure extra due diligence is accorded to all related parties. ### Market risk, interest rate liberalization, liquidity, and operational risk - Market risk: - Despite substantive growth in the Chinese banking system, market risk remains low and the complexity of banks’ market risk profile remains generally straightforward. - Five banks have been approved to use internal models for capital adequacy calculation. - Some medium-sized banks have adopted internal models approach for market risk measurement, risk appetite setting, limit management and capital management. - Pilot schemes to introduce securitization could introduce new challenges, but CBRC confirmed complex transactions (including correlation trading, re-securitization and synthetic products) are not permitted and there is no intention to ever permit such products. - CBRC should be well placed to implement the revised Basel market risk standard following the fundamental review of the trading book and should remain vigilant and continue building market risk capacity. - Interest rate liberalization: - Phased liberalization of interest rates appears to have given banks time to adapt and, to date, banks’ behavior is still largely conservative. - CBRC has enhanced specialist staff, its outlier analyses, and is introducing pilot projects in targeted locations for more demanding stress and scenario testing (e.g. 250 and 300 basis point shifts as well as twists). - Banks are required to undertake their own scenario analysis and interest rate sensitivity is incorporated in stress testing. - Recommendation: CBRC is encouraged to use the adoption of the revised Basel standard as a springboard for issuing more extensive guidance to the industry. - Liquidity risk: - CBRC’s approach to liquidity risk supervision is more sophisticated and intensive than at its last assessment. - All banks with at least RMB200bn total assets are subject to the LCR and this represents about 90 percent of the assets of the banking system. - All banks, including those below the LCR threshold, must meet the liquidity ratio and all without exception are subject to liquidity risk management standards and monitoring tools based on the Basel standard. - Lower tier banks are becoming increasingly dependent on wholesale funding and, to the extent that this sector is not subject to the LCR, the CBRC should devote particular supervisory focus. - Recommendation: severe scenarios and parameters are needed in banks’ internal stress tests to address shocks including on wholesale funding and potential contagion risk in WMPs causing high demand for outflows. - CBRC was awaiting the Basel Regulatory Consistency Assessment Program (RCAP) mission to examine the regulatory implementation of the Liquidity Coverage Ratio; BCP and RCAP assessments have overlapping but not identical focus. - From the BCP perspective, CBRC is encouraged to be highly assertive in setting industry expectations in building scenarios, stress testing and contingency planning; such stress testing practices should be linked to capital adequacy and Pillar 2 planning. - Operational risk: - CBRC does not permit advanced modelling approaches for capital adequacy and its operational risk supervision has a strong emphasis on business continuity and IT practices. - CBRC does not employ operational risk specialists. - Variation exists in sophistication of banks’ operational risk approaches; some banks seek internal approaches for credit risk but remain content with analytical approaches to operational risk based on the basic indicator approach. - Recommendation: scope exists, through implementation of the expected revised Basel standard on operational risk, to encourage development of operational risk standards within banks beyond internal controls and IT environment. ### Controls, audit, accounting, disclosure, and transparency (CPs 26 to 28) - Internal control, compliance and audit: - Strong emphasis on internal control, compliance and audit throughout supervisory processes. - The effectiveness of the three lines of defense is a key area of supervisory focus. - CBRC has established requirements on qualification and independence of external auditors, to mandate rotation of audit firm, and to strengthen communication between supervisors and auditors. - Limitation: CBRC does not have direct power to reject or rescind the appointment of the external auditor deemed unfit to perform a reliable and independent audit. - Recommendation: increase audit oversight and quality review of the audit of small-to-medium sized banks. - Accounting, disclosures and auditing: - Accounting, disclosures and auditing standards in China are substantially in line with international standards and all banks are required to prepare audited financial statements. - Listed banks, which account for close to 80% of total banking system assets, have appointed international accounting firms as their external auditors, and their accounting and information disclosures are generally comprehensive. - Recommendation: there is room for more disclosures on aggregate statistics and risk indicators for overall banking industry to facilitate better understanding among market participants, analysts and the public. ### Abuse of financial services (CP29) and AML/CFT - Developments: - Both the regulatory framework and supervisory practices have continued to develop since the last assessment but some gaps remain. - An important initiative has been establishment of the AML JMC as a valuable cross-body authority to consider and develop policies and strategies in respect of AML/CFT issues. - Cooperation between the PBC and the CBRC is strong at a policy level. - Recent decision for the CBRC and PBC AML Bureau to conduct joint on-site examinations is welcome and expected to yield valuable results and insights. - Gaps and recommendations: - Regulatory guidance should be improved by broadening requirements related to Politically Exposed Persons to domestic individuals as well as foreign persons. - Requirements should be enhanced in relation to banks’ obligation to identify the ultimate beneficiaries of transactions. - Authorities are encouraged to reconsider calibration of the severity of the fines permitted under the AML Law and consider a more explicit linkage between multiple offences and repeat offences and additional measures being imposed by the CBRC. *Source: IMF/WB BCP assessment text in "cr17403 - 14. The CBRC needs to continue maturing its diagnostic skills in integrating information"* ### 35. The assessment team reviewed the framework of laws, rules, and guidance and held ### cr17403 - 35. The assessment team reviewed the framework of laws, rules, and guidance and held ### Assessment process and cooperation - The assessment team reviewed the framework of laws, rules, and guidance and held extensive meetings with authorities and market participants. - Meetings were held with officials of CBRC, including from the provincial office of the CBRC in Chongqing, and additional meetings were held with the People’s Bank of China (PBC), the Ministry of Finance (MoF), auditing firms, and banking sector participants. - The authorities provided: - a comprehensive self-assessment of the CPs, - detailed responses to additional questionnaires, - facilitated access to staff and to supervisory documents and files on a confidential basis. - Time constraints limited the completeness of document study, but the authorities facilitated access to the extent possible. - The team appreciated the very high quality of cooperation and extended thanks to staff of the authorities, in Beijing and Chongqing, who provided documentation and technical support. ### Context and approach to evaluating Core Principles (CPs) and Basel Core Principles (BCPs) - Standards were evaluated in the context of the sophistication and complexity of the financial system of the People’s Republic of China. - The CPs are designed to be applicable to a wide range of jurisdictions and adopt a proportionate approach: - Supervisory expectations are proportionate to the supervisor’s functions. - Standards imposed on banks are proportionate to banks’ complexity, interconnectedness, size, risk profile, and cross-border operations. - Assessments must consider the context in which supervisory practices are applied; the concept of proportionality underpins all assessment criteria. - An assessment of compliance with the BCPs requires judgment and is not an exact science; adhering to a common, agreed methodology provides an internationally consistent measure against the revised CPs. ### Institutional and market structure—overview - Banking supervision and regulation is carried out by the China Banking Regulatory Commission (CBRC). - CBRC headquarters in Beijing is supported by a nation-wide structure of 36 provisional offices. - The CBRC maintains over 300 field offices and more than 1,700 supervisory agencies as well as four training centers. - CBRC is one of three financial sector regulators; the others are: - China Insurance Regulatory Commission (CIRC) — insurance sector, - China Securities Regulatory Commission (CSRC) — securities industry. - The CBRC is a ministry-level government agency directly under the State Council (SC). - Some banking supervisory functions, specifically in relation to AML/CFT, are the responsibility of the People’s Bank of China (PBC). Key statistics and structural facts: - Credit growth in China averaged around 20 percent per year between 2009 and 2015. - Private credit to GDP rose to over 200 percent. - China is home to 4 of the world’s 5 largest banks and has: - the second-largest stock market, - the third-largest bond market. - Ping An Insurance is classified as a G-SII and the insurance market has grown at annual rates of 20 percent in recent years. - Since 2010, only 60 percent of the growth in total social financing has been in bank assets; the remainder has been largely in nonbank debt. - P2P has grown from zero to $65 billion since 2012. - At end 2015 there were 40 foreign-owned banking institutions; equity investment by foreign financial institutions into domestic banks is permitted up to a limit of 20 percent per holding. Bank asset, funding, and liquidity profile: - Bank assets grew at 16 percent over the twelve months to September 2016. - New lending from policy banks made up 13.8 percent of the total new loans (17 percent in 2015). - Bank claims on nonbank financial institutions rose to around 11 percent of total bank assets by Q2, up from 3 percent in 2011. - The ratio of wholesale funding to total funding has more than doubled to 31 percent since 2011. - Deposits account for 69 percent of banking sector liabilities. - Daily volume of repos reached RMB 1.4 trillion in December 2015. - Medium and smaller banks have funded growth through wealth management products (WMPs) and short-term wholesale financing via the “interbank” market. Capital, liquidity, profitability, and asset quality: - Average regulatory capital ratio in 2016Q2 was 13.1 percent (11.1 Tier 1 capital). - Liquid assets have accounted for a relatively constant 20 percent of total assets since 2013. - Liquid liabilities are slightly less than half of total liabilities. - ROA fell from 1.3 percent in 2013 to 1.1 percent in 2016Q2. - ROE fell from 19.2 to 15.2 percent between 2013 and 2016Q2. - Net open foreign exchange positions are around 3 percent of capital. - Nonperforming loan ratio (NPL) rose to 1.8 percent (up from 1 percent in 2013). - The sum of NPLs and special-mention loans rose to around 5½ percent of GDP. - Lending composition shift: mortgage lending growing rapidly; smaller banks moved into riskier lending and products invested in nonstandard credit assets. - Nonstandard credit assets include trust loans, various types of beneficiary rights, bills of exchange, letters of credit, accounts receivables and equity financing under repurchase agreements. ### Preconditions for effective banking supervision - Macroeconomic and financial policy framework: - Authorities aim to reorient the economy towards consumption-led growth as articulated in the 13th Five Year Plan. - Target growth levels have been reduced. - A program of supply side reforms is being implemented. - The government plans to move to an effectively floating exchange rate regime by around 2018. - GDP growth remains high, fiscal policy expansionary, government debt levels remain relatively low, and inflation is at a low level. - China continues to run a large current account surplus. - Policy-making infrastructure: - Sector-based regulatory framework in place since the late 1990s: CBRC, CSRC, CIRC. - PBC is responsible for financial stability. - All agencies fall under the leadership of the State Council for coordinating financial stability policies. Well-established financial stability policy system: - The State Council established the Financial Crisis Response Group (FCRG) after the global financial crisis. - PBC is responsible for analyzing macro-financial stability; CBRC, CSRC and CIRC roll out prudential supervisory arrangements. - In August 2013, the Financial Regulatory Coordination Joint Ministerial Committee (JMC) was established to enhance coordination between monetary policies and financial regulatory policies and to close supervisory loopholes. Systemic risk monitoring and coordination: - The PBC, CBRC, CSRC and CIRC collaborate to tackle cross-sector and cross-market risks and to identify and monitor economic and financial factors that may lead to systemic risks. ### Public infrastructure and related systems Business law and judicial framework: - Legislative framework includes company, bankruptcy and contract laws and laws on consumer rights and property. - Judicial system comprises investigation and prosecution services, courts and penal system, people’s mediation, and lawyer and notary services. - Judicial independence is protected by the Constitution. - Reforms to improve judicial effectiveness and accessibility include online case registration and circuit courts. - Legal aid expanded with RMB 260 million litigation fees exempted in 2015. - In 2015, courts heard 10.09 million civil and commercial cases in the first instance, with 9.57 million concluded and 910,000 appealed, of which 900,000 were concluded on appeal. Accounting, auditing, and professional capacity: - Accounting and auditing standards: - Accounting Law, Law on Certified Public Accountants and Accounting Standards for Business Enterprises (ASBE) are in place. - ASBEs, issued originally in 2006, are generally based closely on IFRS. - The MoF is revising China’s auditing standards with reference to IAASB updates. - Use of IFRS is not permitted for domestic reporting, though companies listed on the Hong Kong Stock Exchange may use IFRS for Hong Kong reporting. - Audit firm oversight: - Audit firms are licensed; oversight is undertaken by the MoF and provincial governmental finance departments. - Licenses for individual auditors issued by provincial CPA institutes. - The Chinese Institute of Certified Public Accountants (CICPA) provides a second layer of oversight. - Firms auditing listed entities must be licensed by the CSRC. - China is not currently a member of the International Forum of Independent Audit Regulators. - Professional resources: - As of end-2015 there were over 8,300 accounting firms (including branches), around 100,000 practicing CPAs, and more than 300,000 practitioners in the industry. - Small and medium-sized accounting firms are subject to an examination every 5 years; from 2010 to 2015 over 8,000 examinations were carried out. - Since 2011, the CICPA has examined over 7,600 accounting firms and conducted random inspections of 74,000 business activities. - Legal profession: - The Law of the People’s Republic of China on Lawyers prescribes criteria for competence and ethics. - By the end of 2015, there were over 24,000 law firms and 297,000 lawyers nationwide. Regulation and supervision of other financial markets: - Sectoral supervision applies: banking, securities, and insurance sectors separately regulated by CBRC, CSRC, and CIRC respectively. - PBC is the supervisory authority of the interbank bond market, interbank lending market and gold market, with statutory authority granted by the Law of the People’s Republic of China on the People’s Bank of China. Payment and settlement systems and FMIs: - China’s FMIs are among the largest and most complex in the world, including interbank payment systems, settlement systems and CCPs for securities, exchange-traded derivatives and OTC derivatives. - All settle directly or indirectly in the RTGS system—the High-Value Payment System (HVPS) operated by the PBC. - China’s Cross-border Interbank Payment System (CIPS) was recently launched to facilitate clearing and settlement of cross-border renminbi payments. - In 2015, the payment system of the PBC processed 5.996 billion payments worth RMB 3,135.25 trillion, up by 43.31 percent and 27.67 percent respectively over the year. Credit reporting and information systems: - In 2006 China built a nationwide database of financial credit information connecting banks, rural credit cooperatives, consumer finance companies, micro credit companies, finance companies, AMCs, trust companies, insurance companies and guarantee companies. - The government built a national credit information sharing platform and launched www.creditchina.gov.cn. - In June 2014, the State Council issued the Planning Outline for the Construction of a Social Credit System (2014-2020) aiming to basically build a society-wide credit reporting system based on credit information sharing by 2020. Public statistics and transparency: - Economic and social statistics are available via the National Bureau of Statistics website (www.stats.gov.cn), press conferences, national databases, China Statistical Yearbook and other publications. - Basic financial statistics are accessible through the PBC website (www.pbc.gov.cn) and the CBRC website. - The PBC discloses official reserve assets and data templates for international reserve and foreign currency liquidity; CBRC provides banking sector data. - China adopted the IMF Special Data Dissemination Standard (SDDS) in 2015. *Source: cr17403 - 35. The assessment team reviewed the framework of laws, rules, and guidance and held* ### 60. The CBRC has the powers to take over, restructure or close distressed banking financial ### 60. The CBRC has the powers to take over, restructure or close distressed banking financial institutions ### CBRC statutory powers and court remedies - The CBRC may take over a banking financial institution or facilitate its restructuring where the institution "has experienced or is likely to experience a credit crisis that will severely jeopardize the lawful rights and interests of depositors and other customers." - The CBRC may close a banking financial institution where it "fails to comply with applicable laws and regulations or is not properly operated or managed, and such failure or poor operation/management will severely threaten financial order and/or undermine public interests (The Banking Supervision Law)." - The CBRC has the right to apply to the courts to initiate "bankruptcy, reorganization or liquidation processes of a commercial bank that is unable to pay its debts or is likely to become insolvent (the Commercial Bank Law and the Enterprise Bankruptcy Law)." ### Supervisory coordination and crisis-resolution arrangements - Mechanisms for information sharing and supervisory coordination among CBRC, PBC, MOF, and relevant agencies have been put into place. - Crisis resolution efforts are coordinated through the JMC in a typical scenario that: - PBC provides liquidity support via financial-stability-oriented re-lending, and - the Deposit Insurance Fund repays insured deposits pursuant to applicable regulations. ### Crisis Management Groups (CMGs) and resolvability work - Crisis management groups (CMGs) are being established for G-SIBs: - A domestic CMG comprising members from CBRC, PBC and MOF has been formed. - A cross-border CMG with members from the home country and key host countries has been formed. - The CMGs are responsible for developing recovery and resolution plans and regularly evaluating and improving such plans. - In 2015, China conducted the resolvability assessment of G-SIBs. ### Legislative developments on resolution and recovery - Chinese authorities are updating legislation to meet developing international standards in resolution and recovery. - The Regulations on Resolving Bankruptcy Risk of Commercial Banks has been drafted and is under revision. - The draft references the Key Attributes of Effective Resolution Regimes for Financial Institutions published by the FSB and "reflects considerations on the liquidation system stability, close-out netting, cross-border resolution, etc." ### Public safety net: deposit insurance - Deposit insurance protection was put in place as of May 1, 2015. - The Regulations on Deposit Insurance set forth provisions on: - compulsory insurance, - reimbursement limit, - base premium rate, and - differential premium systems, as required by the Core Principles for Effective Deposit Insurance Systems and other international deposit insurance standards. - The deposit insurance system strengthens information sharing in the current financial regulatory coordination mechanism, and supports supervisory work. ### Effective market discipline and disclosure requirements - Requirements supporting transparency include: - Under the Company Law, the Securities Law and the Commercial Bank Law, borrowers shall make timely and accurate disclosure of information on their production, operation and financial position to the lenders and investors. - In 2014, the State Council issued the Interim Regulations on Enterprise Information Disclosure, stipulating that government departments shall lawfully disclose enterprises’ information and enterprises shall, besides annual reports, disclose other information as required hereof. - Where a borrower fails to make timely disclosure, investors and creditors can take necessary protective measures pursuant to the above laws, regulations and related contracts. *cr17403 - 60. The CBRC has the powers to take over, restructure or close distressed banking financial* ### 66. Banks are subject to information disclosure standards set out in the CBRC’s Guidelines on ### cr17403 - 66. Banks are subject to information disclosure standards set out in the CBRC’s Guidelines on ### Supervisory powers, responsibilities and framework (Principle 1) - CBRC is responsible for banking supervision in China (Banking Supervision Law, Art 2). - Legal objectives of supervision: - Article 3: promote the safety and soundness of the banking industry and maintain public confidence; protect fair competition and competitiveness of the banking industry. - Article 4: exercise banking regulation and supervision in accordance with laws and regulations and in line with the principles of openness, fairness and efficiency. - People’s Bank of China (PBC) responsibilities include maintaining stability of the financial industry and power to promulgate and implement orders and regulations relevant to its functions (PBC Law, Art 2). - Article 33 (PBC Law): “PBC may suggest that CBRC make inspections and supervision over banking institutions.” - Article 76 and 77 (Commercial Banking Law): PBC can suggest CBRC order temporary suspension of business or revocation of license in certain cases; CBRC reports PBC has never exercised such powers in practice. - Assessment of Principle 1: Compliant. ### Legal framework, scope and updates (EC1, EC3, EC4) - Three-tier legal framework: - Laws promulgated/amended by National People’s Congress and its Standing Committee (e.g., Banking Supervision Law, Commercial Bank Law). - Administrative regulations promulgated/amended by the State Council (e.g., Regulation on Administration of Foreign-funded Banks). - Supervisory rules and regulations issued by CBRC (notices, opinions, guidelines). - Article 21 (Banking Supervision Law): prudential rules may be in laws, administrative regulations, or formulated by CBRC; prudential rules shall cover risk management, internal controls, capital adequacy, asset quality, loan loss provisioning, risk concentrations, connected transactions, liquidity management. - Article 25: CBRC shall regulate and supervise banking institutions on a consolidated basis. - Article 27: CBRC required to establish a rating system and early warning system to determine frequency and scope of on-site examination and other supervisory measures. - Law update process: - Laws updated via five-year legislation plan; Commercial Bank Law first released in 1995 and amended in 2003 and 2015; Banking Supervision Law issued in 2003 and amended in 2006. - Commercial Bank Law included in Legislation Plan 2013-2018 for review; Banking Supervision Law not included in current five-year plan. - CBRC practice: - CBRC has updated prudential rules over the past five years including capital framework, leverage ratio, liquidity risk management and corporate governance. - CBRC reports consulting with industry and other authorities; makes regulations available for public comments on its website. ### Supervisory powers and on-site/off-site examination (EC5, EC6, EC7) - Access and examination powers: - Article 33: CBRC can require submission of balance sheets, income statements, other financial/statistical reports, business operations and management information, audit reports prepared by certified public accountants. - Article 34: CBRC may (a) enter banks for on-site examinations; (b) interview banking staff and require explanations; (c) review and copy documents and seal up documents likely to be transferred, concealed or destroyed; (d) examine banks’ IT systems for business operations and management. - Article 46 and Article 75 (Commercial Bank Law): empower CBRC to require corrective measures and impose fines for refusal/obstruction; can require suspension of business or revocation of license in case of continued noncompliance. - Corrective and resolution powers: - Article 37: when a bank fails to meet prudential regulations, CBRC shall require corrective actions within a prescribed period; if not corrected or serious threat exists, CBRC may: (a) suspend part of current businesses and/or withhold approval of new business; (b) restrict dividend or other payments to shareholders; (c) restrict asset transfers; (d) require controlling shareholders to transfer shares or restrict shareholders’ powers; (e) order replacement of board members and/or senior managers or restrict their powers; (f) withhold approval of new branches. - Arts. 45–49: additional corrective actions and penalties for violations (unauthorized branch establishment, unauthorized business change/termination, appointing directors/senior managers without fit-and-proper test, failure to meet prudential rules with serious consequences). - Article 38: CBRC may take over, facilitate restructuring when a banking institution is experiencing or likely to experience financial distress seriously jeopardizing depositors’ interests. - Article 39: CBRC may close a bank when serious violations or significant unsafe/unsound practices threaten financial stability and public interests. - Article 64 (Commercial Banks Law): if a bank experiences or may experience loss of market faith (“occur creditability crisis”) potentially seriously influencing depositors’ interests, CBRC may take over the bank. - Consolidated supervision and related-party oversight: - Article 25: consolidated supervision power. - Guidelines on Consolidated Management and Supervision: principal shareholders must meet CBRC requirements and provide relevant information. - Article 84: CBRC should closely monitor whether principal shareholders’ activities significantly impact consolidated financial condition and risk status. - In practice CBRC has power to review parent companies and affiliates’ activities and reports no difficulty obtaining relevant information. ### Objectives, potential conflicts, and supervisory focus (EC2) - Primary objective: Article 3 of Banking Supervision Law establishes primary objective as promoting safety and soundness and maintaining public confidence. - Subsidiary/developmental objectives: - Commercial Bank Law, Art 1: includes “promoting the development of the socialist market economy.” - Article 34 (Commercial Bank Law): commercial banks shall carry out loan business upon needs of national economy and social development and under guidance of state industrial policies. - CBRC communications and 2015 annual report emphasize promoting banking sector to better serve the real economy, support overseas network expansion, and encourage differentiated regulatory policies (e.g., “One Enterprise, One Policy” loan mechanism; differentiated policies for shantytown renovation projects). - Assessment and findings: - Assessors did not find evidence that CBRC placed prudential safety below objectives of encouraging credit supply to certain sectors; regulations expect banks not to disregard risk management. - A potential conflict exists between safety/soundness and broader developmental objectives, noted as more acute in China due to government policy direction and state ownership. - Assessors recognize circumstances where CBRC may find it difficult to act consistently on primary objective; this concern is reflected in assessment of independence (CP2) and treatment of problem assets (CP18). ### Institutional independence, accountability, governance and resourcing (Principle 2, EC1) - CBRC institutional structure: - Ministerial level organization under the State Council. - 28 departments in head office. - National network of 36 provincial offices, 306 field offices and 1,730 supervisory agencies. - 4 training centers. - Legal independence: - Banking Supervision Law (Article 5): “there shall be no interference by local governments, government agencies at various levels, public organizations or individuals.” - CBRC reports directly to the State Council; no external agency/individual has legal right to direct CBRC decisions. - Representatives from other government agencies or financial industry professionals do not attend CBRC top management working meetings. - Budget and funding: - CBRC funding accounted for and allocated by the MOF as part of central ministries/agencies budget management. - CBRC levies supervision and business fees (institution supervision fee charged in proportion to institution’s capital; business fee related to scale of assets and adjustable according to bank risk rating). Fees flow to central treasury funds. - At present funding received by CBRC is approximately equivalent to the fees charged to banks but there is no formal relationship between these two figures. - Reforms: CBRC headquarters and local offices may now determine part of their budget structure within total amount approved by MOF; may apply for additional budget or adjust budget among project expenditure categories with MOF approval. - Rule-making powers and safeguards: - Article 15 (Banking Supervision Law) and Article 80 (Legislation Law) provide power to issue regulatory rules and standards. - Legislation Law (Article 97): State Council may revoke or amend CBRC regulations that contradict higher laws or are “inappropriate”; no CBRC rule has been amended/withdrawn under this power. - Accountability and transparency: - Article 14: CBRC is subject to oversight by National Audit Office (NAO) and Ministry of Supervision (MOS). - Article 12: CBRC required to make public its supervision processes and procedures, establish supervisory accountability system and internal compliance monitoring. - CBRC website and Annual Report provide organizational structure, legislative/regulatory notices and banking sector statistics. - State Council Working Procedures (Article 34): performance assessment and administrative accountability used to assess implementation of major decisions; CBRC chairman and vice chairs attend State Council work meetings and report on banking sector risk conditions. - CBRC has internal Rules on the Performance and Accountability of CBRC Staff and an internal Accountability Committee headed by the CBRC Chairman. - Governance: - Chairman and five vice Chairmen appointed by the State Council. - At time of assessment, the Chairman also served as a member of the 18th Central Committee of the Communist Party of China. - Limitations in autonomy: - CBRC does not have self-determination over headcount or organizational structure; 2015 reform approvals required State Council headcount department sign-off. In practice, reform proposals were not modified in approval. ### Assessment conclusion and recommended actions - Assessment of Principle 1: Compliant. - Comments summarized: - Legal framework establishes CBRC responsibilities, objectives and powers to authorize banks, regulate, conduct ongoing supervision and undertake corrective actions. - Powers to access parent companies and affiliates not explicitly stated in law but exist in practice through consolidated supervision and information requirements. - Primary objective legally is safety and soundness; subsidiary objectives include protecting fair competition and promoting competitiveness, with additional developmental references in Commercial Banks Law. - Assessors found no direct evidence CBRC jeopardized safety and soundness in pursuit of developmental objectives, but potential conflict exists and could affect consistent prioritization of the primary objective. - Authorities are recommended: - a) to eliminate from the Commercial Banks Law the reference to developmental objectives; - b) to amend the Banking Supervision Law to explicitly grant CBRC powers to have access to de facto parents and their affiliates; - c) to ensure that CBRC clearly and consistently communicates to banks that their first and foremost commitment is to safety and soundness. *IMF Detailed Assessment extract (CR17403) provided in the source content.* ### 2015. One major shift as a result of the 2015 reorganization was the decision that banks ### cr17403 - 2015. One major shift as a result of the 2015 reorganization was the decision that banks ### Supervisory structure and 2015 reorganization - Nationwide banks are supervised from headquarters; regional and local banks are supervised by the Provincial Office network to locate supervisory decisions close to banking activities. - Headquarters retains decision-making powers over market entry (ie initial licensing), exit and change of control; day-to-day supervision is executed at the local level. - The 2015 reforms introduced the Operational Procedures of CBRC Headquarter (Provisional) to: - define powers, responsibilities and procedures regarding development of regulatory rules, licensing, OSS, and on-site examination; - separate development of regulation from implementation, prudential regulation from conduct regulation, administrative affairs from supervisory issues, off-site/on-site supervision from imposing sanctions and penalties; - strengthen coordination between headquarters and local offices for systemic and coordinated supervision. ### Governance, appointment, transparency (EC2 and EC3) - Appointment and tenure - CBRC Chairman appointed following Official Appointment Regulation procedures (recommendation, assessment, discussion and decision-making). - Interim Rules on the Tenure of Government Officials (Article 3) provides heads of government agencies serve for a term of 5 years. - Article 3 of the Interim Rules provides that no more than two consecutive terms should be recommended or served (not mandatory). - Civil Servant Law (Article 13(2)) provides protection against removal for non-statutory causes or via non-statutory procedures. - Restrictions on resignation (for example, Article 81) may prevent standing down if important work is incomplete or if under audit, disciplinary review or investigation. - Grounds for dismissal - Regulations on the Selection and Appointment of Government Officials (Article 57) list grounds including: (a) having reached the age limit for the post or the age of retirement; (b) having been held accountable to such an extent that his/her removal is required; (c) having resigned or been transferred elsewhere; etc. - Public disclosure of reasons for removal is not required by legislation; CBRC Information Disclosure Rules (Article 9(6)) requires disclosure of fact of appointment or dismissal of important personnel, although not the reasons for dismissal. - Transparency and objectives - CBRC publishes supervisory objectives, philosophy, approaches and standards via website, press conferences, annual reports and other media. - Annual Report includes forward-looking section discussing future priorities and recent actions/decisions. - CBRC set up a Transparency Steering Team (2007) and a “transparency coordination mechanism”. - Available on CBRC website: list of administrative responsibilities, list of information disclosed, information disclosure guidebook and rules governing information disclosure; supervisory rules and regulations, licensing and punishment decisions, and some banking industry statistics are accessible online. - Disclosure framework - CBRC Information Disclosure Rules (Article 1) aim to increase transparency and safeguard access to information. - Surveillance and Assessment Rules of CBRC on Government Information Disclosure set requirements on supervising and assessing government information disclosure. - Regulations on Government Information Disclosure issued by the State Council (Article 6, Article 9) require timely and proactive disclosure of specified categories of information. ### Internal governance, emergency processes and conflicts of interest (EC4–EC5) - Internal procedures - CBRC Working Procedures and other internal management rules set reporting lines and decision-making processes; a 2004 document sets cascade of responsibilities and powers from HQ to Provincial, City and County offices. - Banking Supervision Law (Article 12) requires supervisory accountability system and internal oversight mechanism. - Emergency preparedness - Banking Supervision Law (Article 28) requires accountability system linked to specific positions for identification and reporting of banking emergencies and immediate reporting to the head of CBRC if an emergency could trigger systemic banking risk and/or severely affect social stability. - CBRC required (Article 29) to work with PBC, MOF and other authorities to build banking emergency response system, develop contingency plans and define roles and responsibilities. - Rules Governing Contingency Plans (State Council) set requirements on planning, approval, rehearsal, revision, training and publicity of contingency plans. - CBRC issued Major Emergency Events Reporting Policy and supervisory contingency plan for the banking industry; has supervisory contingency plans focusing on key risks with defined reporting lines and decision-making processes. - Emergency Response Law covers natural disasters, calamitous accidents, public health accidents and public security incidents (Article 3). - Conflicts of interest and staff composition - CBRC senior management comprises full-time supervisors with no representation from other government agencies or financial institutions. - Civil Servant Law imposes 3-year period before an official can work in a supervised institution. - Banking Supervision Law (Articles 9, 10 and 11) requires professional skills and integrity, prohibits concurrent holding of positions in any bank, and requires protection of confidentiality; provides for investigation of criminal liability or administrative penalty if State secrets, commercial secrets or personal privacy are infringed. - Civil Servant Law (Articles 68, 70 and 71) and Implementation Rules for Duties Performed by CBRC Staff prohibit conflicts of interest (personal/relative interests or other interfering circumstances). - CBRC recusal and confidentiality rules: Rules on Preserving Work-related Secrets by CBRC Headquarter, CBRC Confidentiality Policy, Code of Conduct for CBRC Staff, Provisional Rules on Performance and Accountability of CBRC Staff, Opinions on Further Strengthening Staff Recusal Rules. - Sanctions for breaches include notice of criticism, transfer, demotion, resignation, dismissal, disciplinary actions, or referral to court (Article 14 of Provisional Rules on Performance and Accountability of CBRC Staff). ### Credibility, international engagement and industry views (EC5 continued) - CBRC has established an International Advisors Council to broaden exposure to leading supervisory expertise. - Increased CBRC participation in international supervisory fora and leadership roles in policy development and practices. - Banks view CBRC as rigorous and constructive; major banks noted long lead times for approvals for advanced methodologies. ### Resources, staffing, technology and training (EC6–EC7) - Funding and headcount - Administrative Rules on the Finance of CBRC, CSRC and CIRC supersede the 2004 Provisional Rules. - From 2011 to 2015, CBRC’s funding increased approximately 6 percent from RMB 4.865 billion to RMB 5.165 billion. - Staffing has remained stable at around 24,000 staff over same period. - Compensation increased by over 44 percent from RMB 1.66 billion in 2011 to RMB 2.401 billion, with average compensation increasing by 42 percent. - Staff turnover rate has been less than 2 percent for the last five years equating to approximately 300 supervisors each year; most departures from HQ in 2014 were director or director general level. - Specialist skills and recruitment - As of end June 2016 there were 32 IT specialists and approximately a hundred risk specialists, of whom 60 are credit risk specialists. - Between end 2010 and end 2015 the banking sector grew from 288 to 1,053 banks and assets of the banking system grew by 110 percent. - Recruitment via Civil Servant Enrollment Examination and public recruitment examinations. Since 2005, 8 public examinations recruited 60 high-caliber professionals, 3 of whom were included in the Thousand Talents Program. - Current headcount approximately 24,000: 15,122 or 64 percent have a bachelor’s degree; 4,471 or 18.92 percent hold a master’s degree or above, including 299 PhD degree holders accounting for 1.27 percent. - External experts, training and technology budgets - CBRC can commission external experts subject to confidentiality arrangements (example: joint project with ADB on off-site indicators and stress tests). - Separate budget for staff training running at around RMB 20 million per year. - Annual investment in IT around RMB 260 million; annual expenses on on-site examination around RMB 400 million; international supervisory cooperation around RMB 8 million. - IT improvements include OSS information system, customer risk information system (“statistical information net”), and Examination and Analysis System Technology (EAST) for on-site examination efficiency. - Training programs and talent pools - Civil Servant Law (Articles 61 and 62) requires initial and professional training, continuous professional development. - CBRC develops annual training plan aligned with supervisory priorities; about 50 training programs per year in recent years. - Since 2013, CBRC held 198 training workshops for 14,000 participants. - Since 2011, 35 overseas training workshops for 1,021 participants. - CBRC issues annual questionnaire to staff to identify skills needed; specialized training for director general level and targeted training for mid-rank officers. - Talent pools: overseas returnees and talents for international organizations; pools dedicated to on-site examination, economic and financial research, regulation formulation and legal affairs, OSS, and financial innovation supervision. - Dedicated experts in capital adequacy, credit, market, liquidity and operational risks. - Expert taskforces for major tasks: borrower rating, debt rating, market risk, Advanced Approach capital adequacy verification for large banks; task forces for financial innovation (wealth management, asset securitization, credit card business). ### Risk-based supervision and allocation of resources (EC8–EC9) - Legal basis and approaches - Banking Supervision Law (Article 27) requires CBRC to establish supervisory rating system and an early risk warning system; determine frequency and scope of on-site examination based on rating and risk profile. - Off-site Surveillance Rules (Article 5 and Article 44) require differentiated OSS and proper allocation of supervisory resources based on risk analysis. - On-site Examination Rules (Article 20) require annual on-site examination plan based on institutional and functional department opinions and local offices. - Rules on Chief Supervisors and Examiners: number of institutions per chief supervisor determined according to risk profile. - Internal Guidelines on Supervisory Ratings of Commercial Banks (Article 16) state supervisory rating results serve as important reference for supervisory plans and resource allocation. - Resource allocation in practice - CBRC allocates more resources to large banks with systemic importance and to addressing prominent risks via OSS, on-site examination and regulation development. - In 2015, 2,142 supervisors were involved in OSS on large banks and 2,260 supervisors in on-site examinations on large banks. - In 2015, on-site examinations of the 5 major banks accounted for 50 percent of the total; 90 percent of CBRC local offices participated in these examinations. ### Legal protection and assessment outcome (EC9 and Principle 2 assessment) - Legal protection - Banking Supervision Law (Article 5) protects CBRC and its staff while performing supervisory responsibilities in accordance with laws and regulations. - Administrative Procedure Law (Article 26) makes the government agency the defendant in lawsuits challenging administrative actions, shielding individual supervisory staff from litigation and costs. - Courts have generally found in favor of CBRC in administrative litigation; litigation costs funded by supervisory authorities and by annual budget if imposed. - Assessment of Principle 2 - Assessment: Materially Non Compliant. - Key concerns: - Potential for State Council to override CBRC regulations or supervisory decisions remains (State Council power unused but not removed). - No legislative requirement to disclose reasons for dismissal of the CBRC Chairman. - Operational independence constrained by lack of autonomy over staffing numbers and internal organization; CBRC cannot increase budget or headcount independently. - Despite 110 percent increase in banking sector assets from end 2010 to end 2015 and growth in number of banks from 288 to 1,053, CBRC headcount remained static. - Need for increased staff complement, especially for skills such as supervisory stress testing and GSIB supervision; decision to increase resources does not rest with CBRC. - Evidence of widening salary gap potentially siphoning seasoned staff into the industry; recommendation for recalibration of salary scales. - Suggested institutional response: - Develop a detailed forward strategy for supervision covering three to five years to articulate the case for resources (CBRC has developed a medium-term fiscal expenditure plan as a step). *Source: cr17403 - 2015. One major shift as a result of the 2015 reorganization was the decision that banks* ### conclusion of the examination; ### cr17403 - conclusion of the examination ### Cooperation and confidentiality (EC3, EC4) - Legal framework enables CBRC to share confidential supervisory information with foreign supervisors: - Article 11 of the Banking Supervision Law requires information confidentiality arrangements with banking supervisors of other countries/regions. - Article 91 of the Guidelines on the Consolidated Management and Supervision of Commercial Banks requires information sharing in accordance with applicable laws, bilateral MOUs and regulatory cooperation agreements; CBRC is responsible for protecting confidentiality. - Article 30 of the Law of the People's Republic of China on Maintaining State Confidentiality: prior approval from relevant departments of the State Council or provincial governments is required where state secrets are to be provided; recipient must sign a confidentiality agreement. - Working Procedures of CBRC on Cross-border Banking Supervisory detail confidentiality procedures and state CBRC may refuse providing information due to confidentiality issues (Article 20). - Article 22 of the Working Procedures of CBRC on Cross-border Banking Supervisory Cooperation: CBRC staff shall abide by confidentiality rules proscribed in MOUs; no information revealed without provider’s approval; CBRC shall ensure safe keeping and use for supervisory purposes only. Article 23: CBRC shall protect confidentiality to the largest extent when required to provide information to judiciary agencies. - In practice: - CBRC has established MoUs and cooperation arrangements with a total of 63 jurisdictions. - Bilateral meetings are systematically conducted with the most relevant jurisdictions. - CBRC organizes supervisory colleges for its 4 G-SIBs and participates as host supervisor; results of examinations have been shared with host authorities upon request. - Assessors had access to MoUs requiring confidentiality and limiting use to supervisory purposes. - Gap and recommendation: - There are no provisions requiring CBRC to notify the originating supervisor when CBRC is legally compelled to disclose confidential information (no obligation to indicate what information and circumstances). CBRC reports never having been subject to such cases. - Recommendation: CBRC should consider including in its procedures the need to notify the foreign supervisor if CBRC is legally compelled to disclose confidential information received from that foreign supervisor. *Description and findings reflect EC3 and EC4 provisions as presented in the source.* ### Support for recovery and resolution (EC5) and related powers - Legal powers and instruments: - Banking Supervision Law: CBRC empowered to take over, facilitate restructuring or close a bank (Article 38; Article 39 for closure when serious unsafe or unsound practices threaten financial stability/public interests). - Article 29 of the Banking Supervision Law: CBRC shall work with PBoC, MoF and other agencies to develop banking emergency response mechanism, contingency plans, designate institutions and staff, and stipulate resolution measures and procedures. CBRC reported an emergency response plan established at the State Council level encompassing banking, insurance and securities. - Article 71 of the Commercial Banks Law: on bankruptcy, with court organizing CBRC and relevant agencies to form liquidation group. - CBRC has drafted the Regulations on Resolving Bankruptcy Risk of Commercial Banks, submitted to the State Council for legal review. - Practice and developments: - CBRC is yet to establish a recovery and resolution framework per se but has drafted regulations. - CBRC informed that an emergency response plan exists at the State Council level. - Assessment: - Principle 3: Compliant. - Comment: Legal and regulatory provisions and arrangements provide a sound framework for cooperation, confidentiality protection and functioning cooperation with domestic and foreign authorities. CBRC should consider procedural enhancement on notification when legally compelled to disclose. ### Permissible activities and use of the word “bank” (Principle 4) - Definitions and scope: - Commercial Banks Law Article 2 defines banks and sets that a commercial bank shall be subject to CBRC approval (Article 11). - Banking Supervision Law (Article 2) defines banking institutions as financial institutions established in China that take deposits from the general public, including commercial banks, urban credit cooperatives and rural credit cooperatives; policy banks are noted as not-deposit takers. - Permissible activities (EC2): - Article 3 of the Commercial Bank Law lists 13 categories of business (deposit taking, lending, settlement, issuing bonds, negotiating government bonds, FX trading, guarantees, interbank operations, and others). - Banks may engage in other activities upon CBRC approval. Banks are not allowed to undertake trust and broker dealer activities, nor invest in non-banking financial institutions, commercial enterprises and non-use real estate property unless authorized by the State Council (Article 43). - In practice, since 2009 CBRC has expanded permissible activities through pilot programs (fund management, equity investments in insurance companies, leasing companies and consumer finance companies). - Article 92: Commercial Bank Law applicable to foreign-funded banks unless other laws/regulations provide otherwise. Foreign-funded Banks Regulations (Article 29) list activities for foreign-funded banks. - Article 3: banks’ business scope defined in articles of association and submitted to CBRC for approval; changes subject to regulatory approval. Breach leads to administrative punishment or criminal liabilities. - Use of the word “bank” (EC3): - Article 11 of the Commercial Bank Law: no entity shall use the word “bank” or engage in deposit taking or other commercial bank business without CBRC approval. - Article 79: unauthorized use of “bank” ordered to stop; illegal gains confiscated or a fine imposed (if illegal gains are less than RMB 50,000 yuan). - Article 81 and Criminal Law Articles 174 and 176: setting up a bank without approval or taking public deposits illegally carries bans and criminal penalties including incarceration and fines. - Deposit-taking (EC4): - Deposits are reserved for banks and rural and credit cooperatives (deposits of rural and credit cooperatives amount to 3.71 percent of total deposits). - Article 11 Commercial Bank Law and Article 19 Banking Supervision Law prohibit deposit taking without CBRC approval. - CBRC has a dedicated department for preventing illegal deposit taking. - Public list of licensed banks (EC5): - CBRC publishes licensing information via: announcements in media; requiring banks to display licenses at service venues; and updating licensing information (including foreign bank branches) on its website. - Assessment: - Principle 4: Compliant. - Comment: Permissible activities clearly defined; the use of the word “bank” is controlled with stringent punishment for unauthorized use or deposit taking. ### Licensing framework and practice (Principle 5) - Authority and volume (EC1): - CBRC is the authority responsible for granting and withdrawing banking licenses (Banking Supervision Law Article 16; Commercial Banks Law Article 11). - From 2011 to 2015 CBRC received 870 applications for commercial banking licenses from domestic entities (8 for private-owned banks; 862 for rural commercial banks); 41 applications from foreign entities (4 subsidiaries, 37 branches). - Approvals for rural commercial banks established via single county-level transformations are handled at CBRC provincial offices; other new licenses are approved at CBRC headquarters with fit and proper assessments at provincial level during establishment/opening. - CBRC imposes ex-ante restrictions for segments (e.g., rural banks subject to higher capital requirements at onset: 12 percent). - Criteria and rejection powers (EC2): - Article 16, Administrative Licensing Law and CBRC regulation on procedures of Administrative License provide grounds and procedures for rejection (Arts. 13, 14, 29). Applicants must supply required materials within three months or application can be rejected. - CBRC may revoke licenses when based on false or concealed information (Art. 46 Banking Supervision Law; Article78 and Article69 Administrative Licensing Law). - From 2011 to 2015, 31 out of 870 applications were denied (mainly due to prudential indicators or promoters qualifications). - Consistency with ongoing supervision (EC3): - Licensing criteria include directors and senior management with professional knowledge and experience, sound organization and risk management (Article 12 Commercial Bank Law) and are consistent with ongoing supervision. - Structures and group considerations (EC4): - Article 12 Commercial Banks Law sets requirements (articles of association, minimum registered capital, directors and senior management expertise, sound organization, business venues and facilities). - Article 15 requires submission of detailed documents (articles draft; qualification certificates; certificate of capital; list of shareholders; certificates of credibility for shareholders with ≥5% holdings; business policies and plans; place of business; other documents). - Licensing Manuals prohibit certain companies from being promoters/shareholders (evidently defective governance, complex equity relationships, not prominent core business, holding shares on behalf of others). - No explicit prohibition on shell banks in law; authorities report none operating in practice. - Shareholder suitability and capital (EC5, EC6): - Article 15 and Company Law provisions require shareholder information and capital certification. CBRC Licensing Manuals require sound corporate governance, genuine and legitimate sources of capital. - Certificate of capital issued by legal capital checking organ required; Article 17 Banking Supervision Law requires CBRC to review sources of capital and ability to provide additional support. - Commercial Bank Law minimum registered capital requirements: - National commercial banks: RMB one billion Yuan. - City commercial banks: RMB 100 million Yuan. - Rural commercial banks: RMB 50 million Yuan. - Fit and proper tests (EC7): - Article 20 Banking Supervision Law requires CBRC to conduct fit and proper tests. - Administrative Rules and Licensing Manuals set criteria including experience, integrity, conflict of interest prohibitions, disqualifying circumstances (Articles 6, 8–11). - Licensing Manuals require five years or more of experience in relevant fields for directors (Article 82 Licensing Manual). - Business plans, controls, AML (EC8): - Applicants must submit feasibility study and business plans (Article 14); CBRC can require additional materials (Article 15). - On-site examinations assess risk management, IT, internal controls and AML before operations begin. - Anti-money Laundering Law Article 15: financial institutions must have AML internal control systems with senior management responsibility. - Financial projections (EC9): - CBRC reviews pro forma financial statements and projections; promoters required to meet criteria (net assets ≥ 30 percent of total assets; equity investment ≤ 50 percent of net assets in principle). - Files confirmed assessment of shareholders’ financials, taxation records and audited financial statements. - Foreign banks and home supervisor non-objection (EC10): - Foreign-funded Banks Regulations Article 9: shareholders or parent banks must be under effective supervision by home regulators and have home regulator approval; applications require written statement of home regulator(s) approving or no objection. - CBRC gathers information on home supervisory practices and consolidated supervision. - Monitoring new entrants (EC11): - REASS system enables monitoring of newly established banks within OSS; more frequent on-site examinations for new banks; foreign-funded banks subject to overall on-site examination after one year. - Assessment: - Principle 5: Compliant. - Comments: CBRC has powers and processes covering ownership structure, fit and proper, feasibility, financial projections, internal controls and AML. Since 2014 fully private Chinese banks allowed, CBRC should consider reviewing procedures and training to ensure adequacy in analyzing complex ownership and wider-group governance. Further considerations reflected in CP 12 – Consolidated Supervision. ### Transfer of significant ownership (Principle 6) - Definitions and thresholds (EC1, EC2): - Commercial Law Article 216 defines controlling interest (holdings over 50 percent or sufficient voting rights; actual controller concept). - Banking Supervision Law differentiates shareholdings above certain thresholds (require approval for holdings over certain percentages); Article 24 Commercial Bank Law and Article 28 require prior approval for acquisition of 5 percent or more of capital or shares. - Licensing Manuals: proposed ownership changes involving shareholders holding or intending to hold 5 percent or more require CBRC approval; changes involving more than 1 percent but less than 5 percent should be reported. - Framework is silent regarding beneficial ownership; CBRC gathers information on groups including beneficial owners but no legal requirement that significant changes in beneficial ownership are subject to approval. - Powers to approve/reject and remedies (EC3, EC5): - CBRC empowered to reject proposed changes in direct ownership and to revoke changes based on false information (Administrative Licensing Law Articles 78 and 69). - Regulations specify criteria for changes in significant ownership are same as licensing criteria (Licensing Manuals Articles 39, 66, 61). - Over the last five years CBRC approved 2,200 requests and denied 92; no appeals occurred. From 2011 to 2015 CBRC made 21 modifications or reversions to changes of control. - Article 74 Commercial Bank Law prescribes remedies for changes without approval: order to rectify, confiscate unlawful gains, impose fines, suspend business or revoke license; criminal liability where applicable. - Information gathering on shareholders (EC4): - CBRC powers to require reports and conduct on-site examinations (Articles 33–35 Banking Supervision Law). - Article 35 Rules of CBRC on Off-site Surveillance: institutional supervisory departments shall prepare an overview including significant shareholders and update at least annually. - In practice CBRC gathers information on listed banks (≈ 80 percent of banks’ total assets) via disclosure requirements for holdings over 5 percent; for many remaining banks controller is state and shareholder structures fairly simple. Article 123 Guidelines on Corporate Governance: banks must disclose change in controlling shareholders or actual shareholders within 10 working days. - It is unclear whether procedures suffice to obtain names and holdings of those exerting controlling influence in complex structures or where holdings <5 percent still result in control. - Nominees and custodians are not permitted; shareholders shall not hold bank shares on behalf of others and must guarantee funds are their own. - Notification obligations (EC6): - Article 24 Guidelines on Consolidated Management require principal shareholders to provide relevant information; Article 84 requires CBRC to pay continuous attention to principal shareholders for material changes. - Rules for foreign-funded banks require reporting of major troubles in shareholders’ financial condition and material regulatory measures by home supervisors. - No express instruction for Chinese and Rural banks to notify CBRC as soon as they become aware of material information that may negatively affect suitability of a major shareholder or controlling party. - Assessment: - Principle 6: Materially Non-Compliant. - Comments and recommendations: - Legal framework does not require authorization for de facto control changes (indirect controlling interests or cases with holdings <5 percent that entail significant influence). - No systematic process for regularly receiving information on names and holdings of all significant shareholders or those exerting controlling influence. - No legal requirement for Chinese or Rural banks to notify CBRC promptly of material information affecting suitability of a major shareholder. - Authorities are recommended to: - (a) amend legal framework to require all de facto changes of control, directly or indirectly and irrespective of percentage, be subject to CBRC approval; - (b) amend legal framework to have explicit and clear powers to access information on ultimate beneficiary owners and controlling interests, as necessary to perform duties; - (c) expressly require all commercial banks to notify CBRC as soon as they become aware of any material information which may negatively affect suitability of a major shareholder; - (d) establish procedures to receive periodic information on names and holdings of all significant shareholders or those that exert controlling influence over a bank. ### Major acquisitions and investments (Principle 7) - Scope and approval (EC1): - Banks not allowed to invest in non-bank financial institutions or enterprises unless authorized by the State Council (Article 43). - All acquisitions and investments by Chinese banks and rural banks are subject to CBRC approval. Investments/acquisitions of banking institutions subject to a total cap of 50 percent of net assets. - Licensing Manuals: Chinese Commercial Banks Manual Articles 34–36 require approval for domestic and overseas acquisitions/investments; Rural banks Manual Article 43 requires approval for rural banks. Licensing Manual for Foreign-funded Banks currently makes no reference to acquisitions. - Criteria for approval (EC2, EC4): - Licensing Manual Articles set criteria: sound corporate governance, effective risk management and internal controls, consolidated management capability, profitability (e.g., profitable for 3 consecutive accounting years for domestic targets), and equity investment generally not exceeding 50 percent of net assets. - Overseas acquisitions require adequate management, risk management and controls commensurate with overseas environment, a clear overseas strategy, and total assets generally over RMB 100 billion yuan for acquirers in Article 35 for outbound investment. - CBRC requires submission of plans for integration, risk isolation arrangements, consolidated management policies, and verifies managerial, IT and internal control capabilities. - In practice CBRC only considers applications where banks are rated 2 or above (not established in written procedures). - Consideration of supervision in host country (EC3): - Article 80 Consolidated Management and Supervision Guidelines: CBRC shall consider corporate governance and consolidated management capability and may reject if material deficiencies detected. - Article 90 requires assessment of host country regulatory environment and may prohibit or restrict establishment in countries with inadequate supervision or hindering information flows. CBRC has not had to apply such restrictions to date. - CBRC uses MoUs, host authority websites, FSAPs, OECD classification and public ratings to assess host supervision. - Non-banking activities and risk mitigation (EC5): - CBRC aware of risks from non-banking activities and restricts such investments in principle; pilot programs for fund management, insurance, leasing and consumer finance are subject to specific regulatory requirements and firewalls. - Examples: Administrative Rules on the Pilot Establishment of Fund Management Companies by Commercial Banks set corporate governance, risk segregation and restrictions (assets not used to purchase negotiable securities issued/underwritten by shareholders during underwriting period; commercial bank may not act as trustee of funds managed by its own fund management company). - CBRC conducts evaluations pre- and post-authorization and may authorize piloted businesses initially for a limited number of outlets with monitoring. - Assessment: - Principle 7: Compliant. - Comments: Investments and acquisitions tightly controlled; CBRC should exercise caution when authorizing non-banking activities and ensure robust regulatory frameworks. With growing sophistication and expansion abroad, CBRC should ensure preparedness to assess joint ventures and strategic investments. ### Supervisory approach and systemic risk (Principle 8) - Risk-based methodology and supervisory cycle (EC1, EC2): - Banking Supervision Law Article 27 requires CBRC to establish a supervisory rating system and early warning system determining frequency and scope of on-site examinations and supervisory actions. Article 25 requires consolidated supervision. - CBRC adopts on- and off-site approaches using OSS and on-site examinations. Supervisory cycle: supervision planning; day-to-day monitoring and analysis; risk assessment; collaboration with on-site examinations; supervisory rating; supervisory conclusion. - CBRC prepares assessment reports and rates banks using CAMELS+I (components: Capital adequacy (C), Asset quality (A), Management (M), Earnings (E), Liquidity (L), Sensitivity to market risk (S), IT risk (I)). - Supervisory weighting (Guidelines on Supervisory Ratings of Commercial Banks): capital adequacy 15 percent; asset quality 15 percent; quality of management 20 percent; profitability 10 percent; liquidity risk 20 percent; market risk 10 percent; information technology risk 10 percent. CBRC may adjust weight by 5 percentage points for each element. - Ratings adjusted annually unless on-site findings warrant immediate adjustment. - CBRC maintains up-to-date institutional overviews covering ownership, organizational structure, strategy, business profile, management issues, financial positions and projections, supervisory ratings and risk assessments. - Greater intensity directed at systemic and large commercial banks; 2016 evolution of CARPALS into Heightened Regulatory Standards for Large Banks (HRS). CBRC working with G-SIBs on Basel Principles for risk data aggregation and reporting. The 4 Chinese G-SIBs required to put in place RRPs and submit to Crisis Management Groups. - Early warning and monitoring systems (EC2): - REASS (Risk Early warning Analysis and Supporting System) imports OSS data, calculates key supervisory indicators, generates automatic alerts on breached thresholds and supports comparisons across banks. - HRS sets higher-than-statutory target values incorporated into banks’ annual objectives and evaluated quarterly; breaches trigger risk alerts and corrective requirements. - All banks subject to comprehensive stress tests on- and off-balance sheet; targeted stress tests for new fast-growing businesses. Stress Test Guidelines introduced 2007 and refreshed 2014. - Supervisory responses range from briefings and corrective actions to increased supervision intensity and penalties. - Compliance assessment and enforcement (EC3): - CBRC promotes compliance through rule-making, on-site examinations and OSS. Banking Supervision Law Article 21 and Commercial Bank Law Article 8 prescribe banks’ obligations to comply. Enforcement actions covered in Chapter V Banking Supervision Law and Chapters VII–VIII Commercial Bank Law. - Guidelines require banks to establish compliance management; CBRC examines quality and effectiveness of compliance functions and monitors OSS data for breaches of regulatory requirements (e.g., CAR, liquidity ratio, large exposure limits). - Macro and cross-sectoral analysis (EC4, EC5): - Banking Supervision Law Article 6 requires CBRC to establish information sharing mechanisms with PBC and other regulators. Rules of CBRC on Off-site Surveillance set coordination and communication mechanisms (Articles 21, 22, 25). - CBRC uses quarterly economic and financial briefings, functional department risk information, inclusion of macroeconomic scenarios in stress tests, market monitoring, complaints and petitions, and participation in inter-agency committees (JMC, NDRC, PBC meetings). - CBRC monitors systemic, regional, homogeneous-bank and thematic risks via: Prudential Regulation Bureau surveillance; regional risk supervision reports and coordination mechanisms (e.g., Yangtze River Delta quarterly meeting); classification of banks by type; targeted thematic examinations. - OSS return Table G12 collects quarterly information on loan quality changes; day-to-day interbank market monitoring conducted since 2013 liquidity events. - CBRC participates in inter-agency MOUs and has MOU with CIRC and CSRC on division of responsibilities and cooperation; joint regulatory documents issued for cross-sector issues. - Resolvability and recovery (EC6, EC7): - CBRC required the four G-SIBs to develop RRPs; Crisis Management Groups (CMGs) set up with MOF, PBoC and foreign authorities; RRPs reviewed annually. - CBRC led resolvability assessment of ICBC and BOC in August 2015 per FSB Key Attributes; barriers to orderly resolution identified; CBRC urged corrective actions and timetables. - CBRC developed Resolvability Assessment Manual for G-SIBs. - CBRC formulating Early Intervention and Resolution Procedures of Commercial Banks (2016) specifying procedures for recovery and resolution and cooperation among authorities; not yet used in practice. - CBRC rating triggers early intervention/resolution procedures: ratings between 3 and 6 inclusive trigger early intervention/resolution; ratings 4–5 are problem banks requiring actions; rating 6 triggers exit process. - Perimeter issues and regulatory arbitrage (EC8): - State Council Rules on the Clampdown of Illegal Financial Institutions and Illegal Financial Operations (updated periodically) and Anti-illegal Fund-raising Joint Ministerial Committee (AIFR JMC) with office in CBRC for monitoring illegal fund-raising. - CBRC monitoring and reporting mechanisms for suspected illegal fund-raising feed into AIFR JMC procedures and potential local government investigation and resolution. - Guidelines on Consolidated Management and Supervision Article 87 require CBRC to cover cross-sector conduit businesses of banks and affiliates during consolidated supervision to avoid arbitrage. - CBRC monitors financial innovations and addresses regulatory arbitrage via guidance and supervisory measures (e.g., 2013 Notice on Regulating the Governance of Interbank Business jointly with PBC, CSRC, CIRC and SAFE). - Assessment: - Principle 8: (Findings provided in source text; supervisory systems, methodologies and tools presented; heightened focus on systemic and large banks including HRS, REASS, stress tests, resolvability work and inter-agency coordination.) *End of content unit summary from cr17403 - conclusion of the examination;* ### 2012. It aims to address inaccurate accounting treatments, non-compliant business ### cr17403 - 2012. It aims to address inaccurate accounting treatments, non-compliant business ### Regulatory notices and key requirements - 2012 notice: addresses inaccurate accounting treatments, non-compliant business processes and inadequate risk management in interbank agency payment business; requires banks to uniformly manage all businesses satisfying the definition or substance of interbank agency payment activities and ensure authentic accounting treatments and entrusted payments. - The Notice on Further Standardizing Investment Operations of Wealth Management Business of Commercial Banks (2013): - banks must create a separate account for each wealth management product and manage and conduct accounting on a separate basis; - banks must disclose sufficient information on their non-standard debt investment and place reasonable control on the total amount of wealth management funds invested in non-standard debts; - the amount of wealth management funds invested in non-standard debts must not exceed 35 percent of total amount of wealth management products at any point or four percent of its consolidated assets disclosed in previous year’s annual report, whichever is smaller. - The Notice on Regulating the Governance of Interbank Business (2014): - addresses non-compliant transactions, insufficient information disclosure and regulatory arbitrage from rapid interbank growth; - CBRC, PBC and other national authorities released a joint Notice to standardize interbank transactions and strengthen internal and external management of interbank business. - The Notice of CBRC General Office on Regulating the Transfer of Credit Beneficiary Rights by Banking Financial Institutions (2016): - addresses non-compliant trading structure, imprudence in accounting treatment and provisioning in transactions of loan assets beneficiary rights; - requires banks to standardize business behavior, control risk when conducting transactions of loan assets beneficiary rights, strengthen business compliance, and prevent disguised risk transfer. ### Assessment of Principle 8 - Assessment: Largely Compliant - Key comments: - CBRC plans and executes a high quality supervisory approach and uses broad information sources. - Supervisory programmes have focused on wealth management products and interbank activity. - Assessing resolvability of banks is work in progress: - GSIBs have been subject to resolvability assessment; - CBRC is deliberating on the approach to identifying domestic systemic banks (DSIBs) and will carry out resolvability assessment once DSIB issues are decided upon. - Mitigating factor: CBRC has sound knowledge of banking groups and relative lack of complexity in majority of cases. ### Principle 9 — Supervisory techniques and tools (overview) - Assessment: Compliant - Principle summary: supervisor uses an appropriate range of techniques and tools, deploying resources proportionately by risk profile and systemic importance. ### EC1 — Mix of on-site and off-site supervision (description and findings) - Off-Site Surveillance (OSS) governed by Off-site Surveillance Rules; requires coordination with on-site examinations. - Supervisory cycle determined by institutional supervisory departments reflecting risk profile, systemic importance and availability of supervisor resources. - On-site examination plans consider: institutional/functional supervisory suggestions, systemic/regional risk supervisory department input, banks’ compliance status, supervisory ratings, risk profiles, prior examinations, availability of resources. - Requirements and procedures set out in Rules of CBRC on On-site Examination. - Post-examination follow-up: - findings (Supervisory Opinions of On-site Examination) sent to relevant departments for rectification and ongoing monitoring (see Article 47 of OSS Rules). - specific post-surveillance and post-examination evaluation requirements (Articles 79–85 OSS Rules; Articles 60–63 On-site Examination Rules). - Ratings use Internal Guidelines on Supervisory Ratings of Commercial Banks. - Integration of OSS and on-site: - each bank assigned a chief supervisor for OSS; each on-site exam has a chief examiner; - on-site examines verify business status, risk level, management quality, corporate governance, internal control and risk management; - scope/intensity determined by size, complexity, risk profile and systemic importance. - Frequency benchmark: - full-scope on-site examination of a locally incorporated bank at least once every five years (backstop requirement). - Evaluation methodology: - post-OSE evaluation considers approximately 50 factors or elements relevant for a bank; - mechanisms allow recognition for OSE staff who identify improvements adopted by banks. ### EC2 — Coherent planning and execution process (description and findings) - OSS process contains 6 stages: development of supervisory plan, regular surveillance analysis, risk assessment, coordination with on-site examination, supervisory rating and supervisory summary. - Chief supervisor designs supervisory plan and recommends scope to chief examiner. - End-of-cycle outputs: detailed annual supervisory reports, CAMELS+I risk ratings. - On-site Examination Rules prescribe planning, on-site work and follow-ups; Commercial Banks On-site Examinations Manuals define processes and unified document formats. - Annual national on-site examination plan developed at calendar year start; frequency/scope depend on risk profile, business scope, complexity, risk management capacity, size and systemic importance. - Coordination and information-sharing measures: - real-time online sharing of surveillance and examination reports; - joint work between off-site and on-site staff prior to examinations; - participation in on-site exams by off-site supervisors where necessary; - strengthening communication and application of examination results. - Reporting and escalation: - major issues reported via On-site Examination Information Sharing Letter to institutional supervisory departments; - universal/systemic problems lead to supervisory briefings and risk alerts (example: 2015 Notice on Risk Alert of Negotiable Instruments); - Regulation Improvement Recommendation Letter sent to Legal Department and Prudential Regulation Bureau for mechanism/regulatory gaps. ### EC3 — Use and verification of information sources (description and findings) - Legal powers: Commercial Bank Law and Banking Supervision Law (Articles 61, 55 and others) require submission of financial and accounting statements. - OSS Rules, Internal Guidelines on Supervisory Ratings and Operational Procedures require banks to submit information for safety/soundness and risk assessment. - Regular supervisory returns include capital adequacy, liquidity, large exposures, assets and liabilities, profitability and related party transactions. - Information sources and communication channels: - regular meetings with banks’ Board and senior management (quarterly prudential meetings); - interviews with directors, senior managers and line managers during on-site exams; - external auditors through tripartite or bilateral meetings; - supervisory authorities of major jurisdictions, participation in global supervisory colleges and MoUs on supervisory coordination. - Reliability verification: - on-site examinations validate management/business information via internal rules, meeting minutes, contracts, loan records, original transaction data; - targeted on-site examinations assess quality of supervisory returns; - external auditors audit authenticity of financial reports and internal controls related to financial reports. - CBRC has powers to obtain information from banks’ affiliates where necessary. ### EC4 — Analytical tools used (description and findings) - Tools and practices: - (a) Analysis of financial statements: monthly, quarterly, semi-annual and annual supervisory reports feed supervisory ratings. - (b) Business model analysis: OSS monitors material changes in strategy/business model; on-site deepens understanding of strategy, risk appetite, profitability model and vulnerabilities. - (c) Horizontal peer reviews and thematic examinations: example 2015 targeted examinations on assets management, interbank businesses, exposures to major customers, acceptance bill business. - (d) Stress tests: Guidelines on Stress Tests of Commercial Banks (revised December 2014) require banks to perform regular stress testing proportionate to size/complexity (Articles 6 and 19); CBRC authorized to require stress tests and assess effectiveness; supervisors assess submitted stress test results and on-site examine implementation. - (e) Corporate governance analysis: Guidelines on Corporate Governance of Commercial Banks feed into “M” component of supervisory rating system. - (f) Macro and industry analysis: issuance of supervisory briefings and risk alerts on issues such as excessive credit growth and flawed risk management. ### EC5 — Identification and mitigation of emerging system-wide risks (description and findings) - OSS Rules cover systemic and regional risk monitoring, prevention and control; Article 71 requires establishment of an early warning system. - On-site Examination Rules (Article 57) enable supervisory actions for universal/systemic issues including supervisory announcements and risk warnings. - Inter-authority coordination: - CBRC, PBC, CSRC, CIRC roles and communication channels exist; CBRC, CIRC and CSRC signed MOU on Division of Responsibilities and Cooperation in Financial Supervision and Regulation. - Financial Crisis Response Group (FCRG) set up by State Council after Financial Crisis; JMC established August 2013 to maintain financial stability and coordinate systemic/regional risk responses (PBC provides secretariat). - Examples of joint preventive measures: CBRC participation in NDRC-led taskforce to phase out overcapacities in coal, iron and steel industries; CBRC examines credit exposure risks to these industries. - CBRC engaged in cross-sector initiatives on wealth management products and agency sales of financial products. ### EC6 — Evaluation and reliance on internal audit (description and findings) - Guidelines on Internal Audit of Commercial Banks (Article 42) require CBRC to assess effectiveness of banks’ internal audit through OSS, on-site exams and supervisory interviews. - CBRC reviews internal audit plans, reports and conclusions regularly; on-site examiners assess policy framework, independence, frequency, coverage, staffing and skills. - Assessment methods: interviews, review of audit reports/working documents, independent validation of internal audit effectiveness. - When internal audit deemed effective, results can be used by supervisors; Guidelines (Article 41) authorize CBRC to require internal audit to audit designated contents and submit results. - If deficiencies found, CBRC may issue supervisory letters setting requirements on internal audit system, independence and resources; several banks noted a zero tolerance policy towards errors in internal audit. ### EC7 — Contacts with Board and management (description and findings) - Banking Supervision Law (Article 35) authorizes CBRC to hold supervisory meetings with banks’ directors and senior managers. - OSS interactions include regular/ad hoc meetings, written reports and supervisory visits; prudential interviews brief boards on OSS findings. - On-site examinations include interviews with directors (including independent directors), senior managers, heads of business units, chief compliance officers and chief internal auditors. - CBRC practices: - observes board meetings consistently; - arranges separate meetings with non-executive independent Board members for significant messages; - CBRC chairman meets systemic banks’ Boards. ### EC8 — Communication of supervisory findings (description and findings) - Standard practice: communicate off-site and on-site findings via written reports, meetings and other channels. - OSS Rules (Article 55) and OSE Rules (Article 50) permit communication of supervisory concerns/results to Board, management and principal shareholders. - Written report forms: - supervisory briefings at end of supervisory cycle detailing overall risk conditions, major findings, supervisory ratings and recommendations; - supervisory letters requiring corrections of deficiencies; - alerts to potential risks; - supervisory opinions at conclusion of on-site examinations with remedial actions and rectification plans. - Meetings: - regular prudential meetings, briefings on macro-economic conditions, risk management workshops, meetings at beginning and conclusion of on-site examinations; - inspectors meet with Board at end of examination to discuss identified issues and propose supervisory opinions; Supervisory Opinions submitted to bank’s Board. - tripartite meetings with management and external auditors for audit results and significant findings. ### EC9 — Follow-up and escalation (description and findings) - Internal rules/processes ensure timely implementation of supervisory requirements. - OSS cycle includes continuous assessment and monitoring of banks’ rectification of supervisory concerns. - OSE Rules (Article 55) require on-site departments to assess rectification of deficiencies and authorize review of rectification reports, meetings and follow-up examinations. - Supervisory actions include ongoing supervision, on-site examinations, interviews with the Board and administrative penalties per Banking Supervision Law if timely corrections are not made. - Supervisory Opinions copied to institutional supervisory departments for rectification tracking; follow-up examinations used for significant corrective recommendations. ### EC10 — Notification of substantive changes and emergencies (description and findings) - Rules on Implementing the Regulations on Administration of Foreign-funded Banks (Article 66) require advance or prompt reporting for a range of events for banks with foreign ownership, including: - (a) material problems related with financial position and operating activities; - (b) significant adjustments to operating strategies; - (c) suspending operation for two days or less shall be reported in written format seven days in advance except force majeure; - (d) important Board resolutions for wholly foreign-funded or Sino-foreign joint venture banks; - (e) changes to articles of association, registered capital or registered domicile; - (f) restructuring such as merger or split, and replacement of Board chairman or president (CEO or General Manager); - (g) material problems related to financial position/business operations of shareholders or head office; - (h) major cases involving head office or shareholders; - (i) significant supervisory measures against head office/shareholders/overseas branches by home supervisors; - (j) changes material to financial regulations/supervisory regime in home jurisdictions; - (k) other issues subject to reporting as required by CBRC. - Major Emergency Reporting Policy applies to all banks with requirements for timely and full reports for major emergencies; scope includes criminal cases, unexpected senior management vacancies and events that may lead to systemic risks. - Guidelines on Reputation Risk Management of Commercial Banks (Article 6) require banks to report to CBRC within 12 hours of incidents impairing reputation. ### EC11 — Use of independent third parties (description and findings) - CBRC does not outsource prudential responsibilities but may use independent third parties (e.g., external auditors) for specific supervisory activities. - Prior to commissioning third parties, CBRC assesses independence and skills and performs quality control. - Eligible third-party institutions may be hired by banking financial institutions to carry out on-site examinations pursuant to On-site Examination Rules (Article 24); results must be reported to CBRC. ### EC12 — Supervisory information systems (description and findings) - Unified data collection platform architecture includes OSS feeding into REASS, Examination & Analysis System Technology (EAST), licensing management system, supported by integrated office administration and information platforms. - Three main supervisory data system components: - OSS feeding Risk Early-warning Analysis and Supporting System (REASS) with 25 leading indicators and 24 vulnerability indicators. - Examination & Analysis System Technology (EAST): - initially launched in 2011 and upgraded subsequently; - downloads standard bank data and detects suspicious data and potential risks across accounting, customer, transaction flow, treasury and wealth management, etc.; - assists in confirming/verifying off-site data and specifying examination priorities. - Obligor Risk Monitoring System (ORMS): - collects monthly information on on- and off-balance sheet activities, interbank activities, customer registration, financial status, early-warning indicators, events deserving attention, senior management, shareholders, related companies, collateral and guarantor information; - used to analyze customers/industries concentrated with large exposures and facilitate identification of corporate group risks. - Wealth management oversight: - China Banking Wealth Management Registration System approved for comprehensive registration of wealth management activities; - OSS information system enhanced with summary analysis form and product category analysis form. - CBRC plans continued development of supervisory data management, supervisory operations and information integration systems. ### Assessment and supervisory practice comments (Principle 9) - Overall assessment: Compliant. - Comments: - Supervisory practice is high quality and continues to develop a risk-based approach. - Good planning and execution processes for on-site and off-site activities with substantial investment in data and analytical systems. - Supervisory expectations are clearly communicated and followed up via meetings, notices and risk alerts. - Remaining challenges: - need for more integrated view of industry-wide risks rather than "risk by risk" approach; methodological/statistical developments have improved this but further work remains; - supervisory rating approach allows limited supervisory judgment; recommendation that as banking models diversify, supervisors be permitted—under senior approval as necessary—to vary weightings of rating categories by more than five percent; - resource constraints limit CBRC’s capacity to maintain close oversight of large numbers of smaller/regional institutions. ### Principle 10 — Supervisory reporting (start of content) - Principle summary: supervisor collects, reviews and analyses prudential reports and statistical returns from banks on solo and consolidated basis and independently verifies these reports via on-site examinations or external experts. ### EC1 — Power to require submissions (description and findings) - Legal basis: Banking Supervision Law (Articles 33 and 25), Commercial Bank Law (Article 61), Off-site Surveillance Rules. - Banking Supervision Law (Article 33): authority to require balance sheets, P&Ls, other financial/statistical reports, business/management information and audit reports prepared by certified public accountants. - Banking Supervision Law (Article 25): CBRC shall supervise banking financial institutions on a consolidated basis. - Commercial Bank Law (Article 61): commercial banks shall submit balance sheets, P&Ls and other financial statements, statistical reports and documents to CBRC and PBC. - Off-site Surveillance Rules: banks to submit supervisory and statistical reports at regular intervals or on demand; Article 12 requires regular collection of supervisory returns; Article 34 requires continuous collection of solo information and peer comparisons. - Characteristics of supervisory returns system (dating from 2007): - Inclusive coverage: all banking financial institutions supervised by CBRC required to submit. - Broad contents, including: - assets and liabilities (table G01), off-balance-sheet activities (attached chart 1 of table G01), P&Ls (table G04); - capital adequacy (table G40, G4A, G4B-1, G4E, etc.), leverage ratio (table G44); - liquidity (table G21, G22, G23, G24 and G25); - large exposures (table G14); asset concentrations (part of table G11 and table G53); - asset quality (table G11 and G12); loan loss provisioning (table G03); - related party transactions (table G15); interest rate risk (table G33); market risk (table G32); - specific activities (table G02 derivatives, G06 wealth management business, G17 bank card business, G18 bonds issuance and holdings, G31 investments); - closely watched industries (table G19) and country risks. - Scope of application: supervisory returns reported in three formats — entity without overseas branches, entity with overseas branches and consolidated group. - Supervisors may require additional data, tables, reports and other information as needed. - Use of supervisory returns: supervisory analysis and ratings, statistics for State Council, sharing with PBC, NDRC and other agencies, CBRC annual reports, periodic disclosures and international consultations/assessments. ### EC2 — Reporting instructions and accounting standards (beginning) - Each supervisory return is supplied with detailed instructions covering accounting standards to be used in preparing supervisory reports. *Source: IMF assessment document (cr17403).* ### references, applicable institutions, consolidation requirements, submission date and ### references, applicable institutions, consolidation requirements, submission date and ### Reporting framework, accounting rules and supervisory returns - Supervisory returns are based on the CAS issued by MOF. The CBRC requires banks and banking groups to fully comply with the CAS in the recognition and measurement of assets and liabilities, classification of financial instruments, utilization of fair value and identification of asset impairment while filling the supervisory returns. - The CAS was issued by MOF on February 15, 2006 and became effective on January 1, 2007. - In 2014, MOF issued the CAS No.39 - Fair Value Measurement, which specifies approaches for recognizing and measuring the fair value of assets and liabilities. Article 19 of CAS No.39 provides that in using valuation techniques, business enterprises shall give priority to using relevant observable inputs. Non-observable inputs can only be used when it is impossible or infeasible to obtain observable inputs. - Assets and liabilities eligible for the historical cost principle shall be measured according to the CAS No. 22 –Financial Instrument Identification and Measurement. - Logical validation checks are built into the returns to work within a single return/schedule and between returns and schedules to ensure overall consistency. Where supervisory returns are more difficult to prepare, CBRC’s instructions include detailed worked examples. ### Valuation governance and EC3 (fair value measurement) - The supervisor requires banks to have sound governance structures and control processes for methodologies that produce valuations; the valuation framework and control procedures are subject to adequate independent validation and verification. - Where valuations are not sufficiently prudent, the supervisor requires the bank to make adjustments to its reporting for capital adequacy or regulatory reporting purposes. - Key instruments and requirements: - Guidelines on the Valuation of Financial Instruments' Fair Value of Commercial Banks (Chapter 2 “Internal Control”; Chapter 3 “Valuation”). - Article 5: Board shall establish sound internal control arrangements for fair value valuation and assume ultimate responsibility. - Article 6: Internal control arrangements shall be commensurate with the importance and complexity of financial instruments. - Article 7: Internal control arrangements shall include at least: - (a) developing policies for fair value valuation subject to Board and senior management review and approval; - (b) formulating criteria on accessibility and reliability of mark-to-market, mark-to-model and parameters according to the nature of financial instruments and sources of valuation parameters; - (c) defining circumstances under which the valuation model needs to be modified or changed and corresponding criteria. - Article 8: Independence of front office trading, back office valuation and risk management. - Article 9: Identify, monitor and document material differences of fair value measurements between risk management and accounting treatment on an ongoing basis. - Article 10: Regular internal audit over internal control arrangements, valuation models, parameters and information disclosure. - Article 16: Set up an independent team to validate models before use or after major adjustments. - Annex 13 “Risk Assessment Criteria” to the Capital Rules for Commercial Banks (Provisional) prescribes governance, processes, documentation, approval and clear documentation of valuation approaches, requirement to adopt multiple valuation methods under stress, and valuation capability commensurate with exposures. - Advanced approaches linkage: - Rules for Commercial Banks on Implementing Advanced Approach to Capital Management: - Article 31: FIRB cannot be approved for a bank with significant deficiencies concerning recognition and valuation of eligible pledges and collateral. - Article 34: Internal model-based approach to market risk excluded where market risk management policies have significant deficiencies. ### Submission frequency, scope and comparability (EC4, EC5) - Submission frequencies: - Monthly tables: assets and liabilities, off-balance sheet activities, composition of loans and deposits, loans by industry, five-category classification of asset quality, asset impairment provision, liquidity ratio, loan-to-deposit ratio. - Quarterly tables: capital adequacy, leverage ratio, LCR and NSFR, asset quality, credit concentration, foreign exchange exposures, real estate related business. - Semi-annually: tables covering re-pricing of interest rates and certain advanced measurement approaches to operational risk capital requirements. - Supervisory expectation and deadlines: - CBRC divides quarterly supervisory returns into two batches: - first batch: submitted within 13 days after the end of a quarter; - second batch: submitted within 18 days after the end of a quarter. - Most returns in the first batch cover underlying data related to various risks (P&Ls, asset quality, liquidity excluding LCR and NSFR). - Scope by systemic importance: - The scope of supervisory returns varies by bank size and complexity. Commercial banks whose assets are less than RMB 200 billion are not required to submit the LCR table. - From the beginning of 2016, CBRC required banking groups to increase submission frequency from semi-annual to quarterly. - CBRC may require large banks to submit certain data monthly when needed. - Comparability: - Uniform requirements on submission frequencies and data coverage; stock data date = last day of reporting period; flow data period must be specified as current period or accumulated from beginning of year. - Monthly, quarterly and semi-annual tables are based on the Gregorian calendar. - Instructions provide consistent definitions for indicators appearing in multiple tables. ### Information-gathering powers and group supervision (EC6, EC7) - Legal powers and references: - Banking Supervision Law, OSS Rules, Consolidated Management and Supervision Guidelines confirm CBRC’s information gathering powers and expectations. - Article 34 (Banking Supervision Law): obtain information through staff interviews, examine documents and materials, including information systems; authorized to seal up documents and materials likely to be removed, concealed or destroyed. - Article 12 (OSS Rules): supervisors shall collect supervisory returns on a regular basis and may require necessary data beyond supervisory returns (including internal management reports and internal audit reports). - Consolidated Management and Supervision Guidelines (Articles 24 and 81): principal shareholders must meet prudential supervisory requirements and provide relevant information; supervisor must maintain full understanding of organizational and ownership structures of banking groups and have a risk assessment framework covering non-bank and overseas affiliates. - Practical channels used to obtain group information: - (a) Supervisory returns, e.g., Table on Transactions with Top 10 Related Parties; Table on Wholly-owned or Holding Subsidiary Banks; Table on Wholly-owned or Holding Nonbank Subsidiaries submitted quarterly for large commercial banks. - (b) Regular reports: comprehensive risk management report annually; related party transaction report quarterly. - (c) Submission of “major events”: large banks to report major contingencies and risk events in a timely manner per the Notice on Further Improving Information Submission of Large Banks. - (d) On-site examinations: CBRC may request information of any institutions within the banking group, including internal management materials. - Ancillary sources: contacts with external auditors, supervisory authorities (MOUs, supervisory colleges), public information (annual reports, market reports). - Access to personnel and records: - Article 34 empowers CBRC to enter institutions for on-site examination, interview staff, have full access to documents, and examine IT infrastructure. - Article 35 allows CBRC to hold supervisory meetings with directors and senior managers and require explanations. - Guidelines on Corporate Governance of Commercial Banks (Article 129) authorizes supervisors to assign staff to attend Board and supervisory board meetings as observers. - CBRC uses regular prudential meetings, tripartite meetings with external auditors, visits, interviews and on-site examinations to access records. ### Data quality, verification and validation (EC8, EC9, EC10, EC11, EC12) - Legal liability and senior management responsibility: - Banking Supervision Law Articles 46 and 47 prescribe measures and fines for false submissions, concealment, failure to submit reports; fines range from RMB 200,000 to RMB 500,000 for false information/concealment; fines range from RMB 100,000 to RMB 300,000 for failure to submit required reports where failure to rectify results in fines. - Article 48: disciplinary actions and fines against directors, senior managers and staff (fines ranging from RMB 50,000 to RMB 500,000 if violation does not constitute a crime), temporary or permanent disqualification or bar from the banking industry. - Commercial Bank Law contains similar provisions (Articles 78, 80). - Administrative Rules on Banking Supervisory Statistics (Article 27): banks’ legal representatives or persons in charge are responsible for data authenticity and accuracy. - Notice on Establishing Data Quality Commitment Mechanism for Key Off-site Surveillance Indicators: bank presidents must sign a written commitment regarding OSS data quality. - Data quality standards and operational controls: - Notice on Issuing Provisional Standards for Statistic Data Quality and the Implementation Plan covers 5 aspects: organizational structure and staff; development of policies and rules; system requirements and data standards; data quality monitoring, inspection and evaluation; data submission, application and storage. - Supervisory returns must be approved and signed by senior managers before submission; presidents are required to sign off key quarterly OSS indicators within five working days after the submission deadline. - Where data quality fails standards, CBRC takes supervisory actions; persistent reporting errors with material impact affect supervisory rating and licensing; recurrent material errors lead to administrative penalties. - CBRC measures to enhance data quality: - (a) Locking the data: OSSRS automatically locks supervisory returns on the calendar day after confirmation; banks cannot revise locked tables at their own discretion; to correct, banks submit an unlocking application explaining causes and amounts; CBRC monitors resubmission and substantial improvement observed. - (b) Feedback briefings: cover deadlines, completeness, accuracy and unlocking; banks with material data errors are identified and reports circulated to senior management (banks are named in these reports). - (c) Incorporating data quality into supervisory rating (management factor) as a qualitative indicator. - (d) Assessing data quality against standards and issuing reminding notices, alerts, supervisory opinions of on-site examination and penalty notices; on-site examinations assess governance, rules, system development, information disclosure and reporting. - CBRC has imposed penalties against banks for misreporting including forfeiture of bonuses for responsible individuals. - Verification procedures (EC9): - Logical consistency checks within and between tables; system automatically reports errors and sends feedback requiring rectifications or explanations. - Monitoring of consistency over time and peer group analysis; abnormal shifts trigger alerts and require explanations and rectifications. - On-site examinations verify data and processing procedures, internal data management systems, data generating processes, quality control methods, consistency between supervisory returns and accounting information. - CBRC incorporates data quality into on-site examination program; EAST system assists in process; all major banks assessed in recent years. - CBRC observed supervisory data are generally accurate and intensified focus has greatly improved data quality. - Use of external experts (EC10, EC11): - In general, supervisory returns are validated by CBRC’s in-house on-site examination teams. CBRC does not appoint external experts to conduct supervisory tasks. - CBRC maintains regular communication with banks’ external auditors through tripartite and bilateral meetings; supervisors may communicate with external auditors during on-site examinations. - Periodic review of information collected (EC12): - OSS Rules (Chapter 6 “Post-supervision Evaluation”) require post-OSS evaluation mechanism; Article 83 focuses on effectiveness of OSS including completeness of information collected and appropriateness of OSS indicators. - Since 2007, CBRC assesses annually whether to revise or remove existing tables and develop new tables based on changes in regulations, supervisory focus, international rules and supervisory needs. Cost-benefit analysis used; adjustments made to format, contents, instructions, applicable institutions, submission date and frequencies, and accounting standards. - Examples of changes: - 2013: two new tables developed for Basel III (capital adequacy table and advanced measurement approach table). - 2015: Table G44 for leverage ratio adjusted according to revised Leverage Ratio Rules for Commercial Banks. - 2016: submission frequency of consolidated tables increased from semi-annual to quarterly; Table G25_II for NSFR revised; two new tables G31 (Investment Activities) and G18_III (Local Government Bonds) added; 14 tables removed; scope of applicable institutions for 8 tables narrowed. ### Assessment of Principle 10 - Assessment: Compliant - Comment: CBRC philosophy treats supervisory data as fundamental. CBRC has overhauled reporting data, enhanced analytical systems, uses on- and off-site methods to ensure data reliability, holds banks accountable, and adapts reporting to supervisory tasks. ### Corrective and sanctioning powers (Principle 11; EC1–EC5) - Early engagement and follow-up (EC1): - Legal basis: Article 35 (supervisory meetings), Article 27 (actions based on rating and risk profile), Article 37 (require remedial measures), Article 39 (off-site surveillance risk early-warnings). - REASS system provides alerts to trigger supervisory actions; chief inspector provides qualitative analysis and judgment. - For significant corrective actions, CBRC submits letters requiring the board to be copied and can set up meetings with the Board; CBRC attends Board meetings regularly. - CBRC requests implementation reports and monitors progress via additional data submissions, supervisory interviews, on-site visits and follow-up examinations. - Off-site Surveillance Rules (Article 47) requires tracking correction progress of issues identified during on-site examinations and including correction results in risk assessments, supervisory ratings and licensing decisions. - Activity statistics (2015): CBRC held 14.5 thousand supervisory meetings; issued 2.3 thousand requirements of explanation for material matters; issued 10.5 thousand risk alerts or briefings; required banks to conduct self-assessments/targeted audits, stress tests and develop contingency plans 7.3 thousand times; issued over 3 thousand cases of requirement of specific corrections within a certain time frame. From 2011 to 2015 there was a steady increase in these figures. - Range of supervisory tools (EC2, EC4): - Article 37 (Banking Supervision Law) empowers CBRC to act when banks breach prudential rules or where safety and soundness or depositor interests are threatened. - Possible actions include: - suspend business lines; - withhold approval of new products and services; - restrict dividend or other payments to shareholders; - restrict asset transfers; - order controlling shareholder to transfer shares or restrict powers of shareholders; - order replacement of senior management and board members or restrict their powers; - withhold approval of new branches; - take over a bank or facilitate restructuring (Article 38); - close a bank for serious violations (Article 39). - Articles 45–48 (Legal Liabilities) explicitly empower enforcement of corrective actions and fines. - Capital Rules (Article 153) provide capital-related supervisory classification into four categories with specified supervisory measures: - (a) Banks meeting all capital requirements: may be required to formulate CAR management plans and improve risk control capability. - (b) Banks not satisfying Pillar II capital add-on but meeting other capital requirements: may receive supervisory letters and increased CAR examination frequency. - (c) Banks meeting corresponding minimum requirements but not other capital requirements: will have dividends, bonuses and significant capital expenditures restricted. - (d) Banks failing to satisfy corresponding minimum requirements: will be asked to reduce risk assets, close high-risk operations, and be restricted/prohibited from establishing new branches or new businesses. - CBRC monitors indicators including CAR, leverage ratio, NPL ratio, provisioning ratio, provision coverage ratio, LCR, liquidity ratio, and concentration ratio and may raise quantitative requirements or set special early-warning thresholds. - Early measures include requiring liquidity or capital replenishment commitments and establishment of action plans. - Application of sanctions and measures (EC3, EC5): - Ratings drive actions: single component rating < 4 leads to interviews and required actions; rating 5 or 6 leads to improvement plans, restrictions and possible restructuring/market exit for composite rating 6. - Empirical use (2015 examples): CBRC restricted dividends or other payments in 105 banks; required shareholders to transfer shares or restricted powers in 21 cases; required replacement of board members, senior management and other persons in charge in 50 cases; suspended certain business for rectification in 10 cases; withheld approval of new branches in 45 cases. - Penalties and fines: - False submissions and concealment: fines ranging from RMB 200,000 to RMB 500,000 (Banking Supervision Law Articles 46 and 47). - Failure to submit reports: fines ranging from RMB 100,000 to RMB 300,000. - Article 48: fines ranging from RMB 50,000 to RMB 500,000 for directors, senior managers and other staff when violations do not constitute a crime; temporary or permanent disqualification or barring from the banking industry may be applied. - For establishing a branch without authorization, change/terminate business without authorization, or offer a product/service without approval: illegal gains ceased and fines of one to five times the illegal gains; if illegal gains exceed 500,000 yuan, fine ranging from 500,000 yuan to 2,000,000 yuan; for particularly serious cases or failure to correct, suspension for rectification or revocation of license may follow. *Source: cr17403 - references, applicable institutions, consolidation requirements, submission date and (CR17403 PDF).* ### Chapter 8 of the Commercial Banks Law lays down some similar provisions to the Banking ### cr17403 - Chapter 8 of the Commercial Banks Law lays down some similar provisions to the Banking ### Supervisory sanctions and corrective powers - CBRC authorized under the Banking Supervision Law (Article 37, and 48) and the Commercial Bank Law (Article 89) to impose penalties and sanctions on banks’ directors, senior managers and other persons directly in charge. - Sanctions that CBRC may impose include: - ordering the bank to replace directors and senior managers or restrict their powers; - requiring the bank to impose disciplinary sanctions, warnings or fines on directors, senior managers and other persons directly in charge; - temporarily or permanently disqualifying directors, senior managers and other persons directly in charge or barring them from the banking industry. - Fines: CBRC can impose fines ranging from RMB 50,000 to 500,000 yuan concomitantly with the issuance of a warning to directors and senior managers directly in charge and other staff directly held responsible where the bank violates laws or regulations. - Administrative Rules on the Qualifications of Directors (Arts. 27, 28 and 29) allow suspending qualifications for up to 10 years, depending on nature and seriousness of conditions and consequences. - Circumstances triggering penalties on directors/senior managers include: - failure to comply with laws, regulations and regulatory requirements; - violation of prudential rules and failure to make corrections as required (in terms of actions and timeframe); - internal management and control policies not well-developed or effectively implemented; - providing false documents to supervisors, concealing important facts, or disclosing false information to the public. - Additional enforcement powers during take-over, restructuring, or liquidation: - notify border control authority to prevent directors, senior managers and other persons directly in charge from leaving the country; - submit application to judicial authority to prohibit moving or transferring properties, or establishing other rights on their properties; - inspect accounts of employees and connected parties when bank suspected of illegal financial actions and apply to judicial authority to freeze illegally obtained funds suspected of being transferred or concealed. - Article 7 of the Rules of CBRC on Administrative Penalties: when imposing sanctions on a bank, CBRC shall impose administrative penalties, according to the circumstances, to directors, senior managers and other staff who are directly liable. ### Take-over, restructuring, and resolution (early intervention and crisis management) - Article 38: where a bank is experiencing or likely to experience financial distress seriously jeopardizing depositors’ interests, CBRC may take over the bank or facilitate restructuring. - Article 39: where a bank is found in serious violation of laws/regulations or conducting significantly unsafe or unsound practices seriously threatening financial stability and public interests, CBRC shall have authority to close the bank. - Article 29: CBRC shall work with PBC, MOF and other relevant authorities to establish a banking emergency response policy, develop contingency plans, determine organization and personnel in charge of resolution, and define respective responsibilities, response actions and procedures. - Cooperation in practice: - CBRC consults PBC, MOF, Deposit Insurance Fund and other national authorities where necessary when resolving problem institutions. - Over the last five years CBRC resolved 97 problem banks: one went bankrupt and 96 were restructured. - In practice, cooperatives generally restructured by introducing new strategic shareholders and converting them into rural banks; CBRC did not seek coordination with other authorities in those situations. - Deposit insurance: - In 2015 the deposit insurance regulation established the Deposit Insurance Fund; State Council appointed PBC as the deposit insurance fund management agency. The fund has not been accessed thus far. - Assessment re principle 11: Compliant. Comment: CBRC has a range of powers enabling early action and has exercised them extensively. ### Consolidated supervision (Principle 12) — scope, tools, and findings - Legal and framework basis: - Banking Supervision Law (Article 25) requires CBRC to supervise banks on a consolidated basis. - Consolidated Management and Supervision Guidelines (revised 2014) (Article 81) oblige CBRC to maintain full understanding of organizational and ownership structures and business activities of banking groups. - Article 4 of the Guidelines on Comprehensive Risk Management requires comprehensive risk management covering: (a) all business lines including domestic/foreign currency, on-/off-balance sheet, domestic/overseas activities; (b) all branches, subsidiaries, affiliates, departments, positions and employees; (c) all risk types and their interactions; (d) all processes of decision making, implementation and oversight. - Scope of CBRC authority and information collection: - Articles 21 and 25: authority to set prudential rules on solo and consolidated basis. - Article 33: power to require banks to submit balance sheets, P&Ls, other financial reports, management information, and auditors’ reports. - CBRC designs supervisory returns specific to large banking groups to collect operating information of domestic and overseas affiliates. - Major regulatory indicators set on consolidated and solo basis include the CAR, leverage ratio, provision coverage ratio, liquidity ratio, LCR, provision ratio, and large risk exposure ratio. - Regulations/guidelines include: Capital Rules for Commercial Banks (Provisional), Liquidity Risk Rules for Commercial Banks, Administrative Rules on Related Party Transactions of Commercial Banks with Insiders and Shareholders, Guidelines on Due Diligence in Credit Issuance of Commercial Banks, Key Indicators for Risk-based Supervision of Commercial Banks (Provisional). - CARPALS / HRS: - CARPALS system launched in 2009; upgraded to Heightened Regulatory Standards for Large Banks (HRS) in 2016. - Sets overall caps on debts owed by affiliates to banking groups to prevent intra-group contagion (cap set through a ratio reflecting affiliates’ dependence on debts owed to large banking groups). - Supervision of parent/affiliates: - Article 84: CBRC required to monitor and analyze impact of principal shareholders and affiliates and require risk controls where necessary. - Related Party Transaction Rules (Chapter 5 Legal Liabilities): where shareholder forces bank misconduct, CBRC may restrict shareholder powers or require transfer of shares. - Information collection and monitoring channels: - Institution overview: banks submit information on top five shareholders and shareholders with over 5 percent equity. - Supervisory returns: quarterly data on top 10 related party transactions. - Failure to submit related party report or submission of significant related party transactions can lead to penalty fines ranging from RMB 100,000 to RMB 300,000 if not rectified within prescribed timeframe. - Regular reporting: comprehensive risk management reports (annually) and related party transaction reports (quarterly). - On-site examinations: include internal transactions in the group and related party information. - Information sharing: CBRC regulates trust companies and financial leasing companies within banking groups and obtains information from CSRC, CIRC and other supervisors for securities, insurance and fund companies within groups. - Assessment of Principle 12: Largely Compliant. - Key comment: CBRC focuses on intra-group and related party connections but concerns remain about ability to monitor changes in ownership beyond the immediate parent and the absence of a holding company regime; recommendation for more comprehensive notification and approval obligations on direct/indirect controllers and beneficial owners. ### Home-host relationships (Principle 13) — cross-border supervision, colleges, and crisis cooperation - Cross-border footprint and concentration: - On average cross-border operations of Chinese banks around 7 percent. - BoC with 26% of cross-border operations; ICBC and CCB at 11% each. - Operations concentrated in Hong Kong with 49% of total cross-border operations, US 10%, Macao 7%, UK 5%. - Supervisory colleges and cooperation: - China established supervisory colleges for its G-SIBs; annual colleges for G-SIBs. - Number of colleges: 1 in 2009, 3 in 2015, 4 in 2016 (for all G-SIBs). - CBRC has cooperation mechanisms and MOUs with supervisors in 67 countries and jurisdictions. - CBRC joined supervisory colleges of 26 foreign banks from 2011 to June 2016 and participated in Crisis Management Groups (CMGs) of two foreign banks. - Information sharing: - CBRC has 63 MoUs and other formal arrangements enabling exchange of confidential information (note: text references 63 MoUs in EC2 and 67 countries/jurisdictions in EC3; both figures appear in the text). - Systematic program of bilateral and trilateral meetings with jurisdictions such as Hong Kong, US, UK, Japan, Korea, and Singapore. - Through colleges CBRC shares supervisory assessments, supervisory concerns, management information and other supervisory information. - Cross-border on-site examinations: - CBRC authority: conduct cross-border on-site examinations (Article 7 of Banking Supervision Law; Articles 90 and 91 of Consolidated Management and Supervision Guidelines). - Working Procedures and Rules on On-site Examination prescribe process and coordination with overseas supervisors (pre-briefing and post-briefing). - CBRC practice: conducted 2 cross-border examinations in 2016, 7 in 2015, 3 in 2014 and 16 in 2013. - Crisis cooperation and resolution planning: - CMGs established for each G-SIB with members including CBRC, MOF, PBC and key host authorities. CMG members have jointly signed COAGs on G-SIBs defining obligations, responsibilities, rights and information sharing in crisis. - Resolution plans established for all G-SIBs: - ICBC and BOC resolution plans finalized in 2014; - ABC in 2015; - CCB in 2016. - CMG meetings for the four G-SIBs expected to be held in 2017 and annually thereafter to update plans. - No rule requires G-SIBs to have resolution plans, but they have been developed and are updated annually. - Host-supervisor equivalence: - Article 92 of the Commercial Bank Law: foreign-funded banks operating in China subject to the Commercial Bank Law unless specified differently. - Core prudential standards applied to foreign-funded banks consistent with Chinese banks: CAR, risk concentration, five-category asset classification, provisioning, liquidity requirements, and supervisory reporting. Foreign bank branches also required to comply with net positive domestic asset requirements. - Assessment of Principle 13: Compliant. - Comment: CBRC has significantly expanded MoUs and supervisory colleges and put resolution plans in place. Recommended to continue improving engagements and consider periodic colleges beyond G-SIBs and more proactive communication of significant findings. ### Corporate governance (Principle 14) — supervisory expectations and practices - Legal and guidance framework: - Company Law sets basic provisions; CBRC’s Corporate Governance (CG) Guidelines (2013) establish bank-specific requirements. - Two-tier board system: board of directors and board of supervisors; responsibilities and reporting obligations to CBRC. - Article 7 CG Guidelines: principles/expectations of sound corporate governance include clear organizational structure, appropriate business strategies, corporate values, effective risk management and internal controls, reasonable incentive and accountability framework, and sound information disclosures. - Board responsibilities (Article 19 CG Guidelines) include approving business strategies, risk management and appetite, capital plan, regular governance assessment, information disclosure and financial reporting reliability, safeguarding depositors and stakeholders, and approving conflict-of-interest policies. - Board committees and composition: - Article 22 CG Guidelines: boards shall, according to needs, set up specialized committees (strategy, audit, risk management, affiliated transaction control, nominating, remuneration). - Joint-Stock Banks CG Guidelines Article 54: banks with registered capital exceeding RMB 1 billion shall have a board with at least 3 independent directors. - CSRC-listed banks: one-third independent directors required. - Internal Audit Guidelines (April 2016) require audit committee with majority independent directors and chaired by an independent director. - No explicit requirement in CG Guidelines for risk management committee to be chaired by an independent director or to have a majority of independent directors, though CBRC applies proportionality and expects higher standards for large/listed banks. - Fit and proper standards and appointment procedures: - Administrative Rules on the Qualifications of Directors and internal guidance set criteria: integrity, reputation, knowledge, experience (at least 5 years’ experience in legal, financial sector or accounting firms or other useful organizations), sound employment records, stable personal finances, independence where required, ability to exercise duty of care and loyalty, ability to judge financial institution operations and risks, and understanding of corporate governance structures. - CBRC conducts fit and proper tests including reviewing academic qualifications, relevant experience, written tests and interviews. - Directors subject to annual appraisals; incompetent directors must be replaced (Rules for Performance Appraisal of Directors Article 33). - Compensation governance: - Supervisory Guidelines on Sound Compensation: board responsible for remuneration systems (Article 17); compensation should align with strategic goals, talent development, risk control, and be commensurate with risk-adjusted performance. More than 40% of performance-based remuneration of senior management and material risk takers should be deferred over a term not less than 3 years (Articles 14 and 16). - CBRC conducts onsite examinations of compensation practices; Article 25 of the Guidelines allows CBRC to require corrective actions where practices are non-compliant. - Supervisory practice and assessment: - CBRC regularly assesses corporate governance via offsite review and onsite examinations, fit and proper tests, attendance at board meetings, interviews, and review of minutes and internal documentation. - Corporate governance forms a key component of supervisory ratings; deficiencies addressed via supervisory letters, monitoring of remedial measures, and in severe cases removal of directors. - Assessment of Principle 14: Largely Compliant. - Comment: Progress in CG regime; proportionality approach allows flexibility for smaller banks; areas for enhancement include clearer minimum standards for committee independence and consolidated consolidated guidance aligned with international standards. ### Risk management process (Principle 15) — supervisory expectations (selected findings) - Supervisory requirements and expectations: - Board ultimate responsibility for risk management: Comprehensive Risk Management Guidelines Article 11; CG Guidelines Articles 19, 72, 73, 82 and 83; Consolidated Management and Supervision Guidelines Articles 21, 23 and 35. - Banks required to establish risk management culture, approve risk management strategies, define risk appetite and limits, and oversee senior management in identifying, measuring, monitoring and mitigating risks. - Article 26 Comprehensive Risk Management Guidelines: banks must establish comprehensive risk management policies and procedures including identification, measurement, assessment, monitoring, reporting, control/mitigation and risk aggregation. - Article 4: risk management system must cover bank-wide material risks, be commensurate with risk profile and systemic importance, and take into consideration macroeconomic environment risks. - Supervisory assessment practices: - Supervisors attend board meetings, interview board and senior management, review supervisory board assessments, review minutes, and evaluate implementation and monitoring frameworks. - Onsite examinations focus on methodologies for risk identification/measurement/monitoring/reporting/mitigation and aggregation; stress tests; assessment of risks from new products, major business lines, institutional changes; adequacy of capital, liquidity and contingency and recovery plans. - CBRC devotes more resources to systemically important institutions with more frequent returns, onsite examinations and quarterly risk meetings; requires SIFIs to establish risk data aggregation systems covering all material risks. - Observed supervisory outcomes: - Examinations identified deficiencies in completeness of banks’ risk data aggregation and resulted in risk alerts requiring heightened risk assessment and controls. - Banks required to incorporate macroeconomic assessments into risk management and contingency planning. *Source: cr17403 — Chapter 8 excerpts from the IMF country report text provided.* ### Chapter 3 and 4 of the Comprehensive Risk Management Guidelines set out provisions on ### Chapter 3 and 4: Risk management strategies, risk appetite, limits, and supervisory assessment ### Risk management strategies, policies, procedures, and limits - Articles 14, 20, 25 and 40 require risk management strategies, policies and procedures and risk limits to be properly documented, regularly reviewed and adjusted when necessary, and communicated within the bank. - There should be proper authorization of limits, monitoring of adherence and reporting of positions and limit excesses to senior management, supervisory board and the Board as appropriate. - Article 59 of the Consolidated Management and Supervision Guidelines provides that banks shall establish risk limits, risk thresholds, and limit management processes at the bank group level. - Supervisors review the risk management strategies, major policies and procedures submitted by the banks, giving attention when there are significant changes. - During onsite examination, exceptions to established procedures and limits have been one of the key areas of focus. - By reviewing written documents and holding interviews, the supervisors determine whether established policies, procedures and limits are effectively communicated and implemented. - By reviewing transactional records of business activities, the supervisors also determine whether the policies, processes and limits are complied with. - Supervisors assess how exceptions are identified, reported and whether they are dealt with or authorized at appropriate levels. ### Governance, information, and board/senior management oversight (EC4) - The supervisor determines that the bank’s Board and senior management obtain sufficient information on, and understand, the nature and level of risk being taken by the bank and how this risk relates to adequate levels of capital and liquidity. - The supervisor also determines that the Board and senior management regularly review and understand the implications and limitations (including the risk measurement uncertainties) of the risk management information that they receive. Description and findings re EC4 - As set out in Article 83 of the Corporate Governance Guidelines, a bank’s board and risk management committee are to be updated regularly on the bank’s risk profile and risk management responses and give guidance and direction for comprehensive risks management. - Article 11 and 14 of the Comprehensive Risk Management Guidelines provide that the board and senior management are responsible for obtaining and regularly reviewing information on the bank’s risk profile and risk management. - When conducting fit and proper tests on proposed board or senior management members, CBRC conducts written tests and interviews and assess proposed board members’ ability to understand the nature and level of risk as well as the relationship with capital adequacy. As part of on-going supervision, CBRC evaluates the board and senior management in the following ways: - (a) attends board meetings, board committee meetings and shareholders meeting. Based on presentations and discussions at these meetings, supervisors assess whether the board members understand the nature and level of risks undertaken by the bank. - (b) reviews the minutes of board and board committee meetings, and holding supervisory meetings with the board and senior management. - (c) Conducts onsite examinations to determine whether a bank has put in place a management information system (MIS) that cover all business activities, whether the board and senior management are able to obtain information through the MIS, and whether the reports are reliable and meaningful. - (d) review of banks’ ICAAPs focusing on capital management governance structure (board and senior management’s role), risk assessment, risk measurement, risk aggregation and implementation of capital plans. In the course of this review, supervisors assess whether bank’s board and senior management obtain adequate and timely information and understand the risks undertaken by the bank, and the linkages to capital, liquidity and risk limits. ### Internal capital and liquidity assessment (EC5) - The supervisor determines that banks have an appropriate internal process for assessing their overall capital and liquidity adequacy in relation to their risk appetite and risk profile. - The supervisor reviews and evaluates banks’ internal capital and liquidity adequacy assessments and strategies. *PEOPLE’S REPUBLIC OF CHINA 136 — Chapter 3 and 4, Comprehensive Risk Management Guidelines* ### Chapter 7 of the Capital Rules sets out that a bank shall establish sound risk management ### Chapter 7 of the Capital Rules sets out that a bank shall establish sound risk management systems and robust ICAAPs, formulate capital plans and robust capital management ### Risk management and ICAAP / capital management - Capital and Liquidity are two key components in CBRC’s supervisory ratings; qualitative factors include outcome of CBRC’s evaluation of banks’ internal capital and liquidity adequacy assessment and management processes. - Banks are required to establish ICAAPs at least annually, taking into account their business size and complexity, and submit them to CBRC annually. - CBRC devotes more resources in the review of ICAAP for the large banks and joint-stock commercial banks, focusing in particular on: - (a) effectiveness of capital management governance structure - (b) robustness of risk assessment - (c) whether an information management system supporting risk and capital measurement has been established - (d) whether a monitoring and reporting system has been put in place to monitor and report capital levels and changes of main determinants. - During onsite examinations, supervisors review internal documents on capital management plans and verify CAR computation methodologies; they assess whether CAR targets are determined in line with risk appetite approved by the board. ### Liquidity risk management - The Liquidity Risk Rules require banks to put in place a robust liquidity risk management system to ensure adequate liquidity. - CBRC’s evaluation is based on regular reviews of liquidity risk returns and stress tests conducted by banks, and onsite examinations. - CBRC supervisors review banks’ stress tests on liquidity and incorporate findings into supervisory assessments (see CP 25 for more details on supervisory practices). ### Use of models (EC6) - The Capital Rules prescribe requirements on the use of models to measure credit risks, market risk and operational risks; banks are expected to regularly validate models, assess limitations, monitor model outputs and improve model performance. - Relevant provisions: Articles 114, 115, 117 and 118 and Annex 14 (advanced measurement approaches); Article 17 and 20 of the Guidelines on Market Risk Management of Commercial Banks (market risk-related models and independent validation). - Supervisory practice: - In April 2014, CBRC approved six commercial banks for adoption of advanced approaches (including IRB and IMM) after supervisory assessments from 2009 to 2014. - Post-approval ongoing supervision includes reviewing model performance reports; significant deterioration triggers follow-up, investigation, and possible model modification or recalibration. - CBRC has developed a team of specialists to support supervisory assessments and ongoing model supervision. - During onsite examinations, supervisors review validation programs and regular back testing to determine whether independent model validation is conducted. ### Management information systems and reporting (EC7) - Guidelines on Comprehensive Risk Management and Guidelines on Consolidated Management and Supervision require IT infrastructures commensurate with banks’ risk profile to support consolidated management, risk identification, monitoring and reporting, and assessment of capital and liquidity needs. - Supervisory practice: - Onsite examinations review internal information systems, accuracy, reliability and appropriateness of risk reports, and timeliness of reporting to boards and senior management. - Supervisors review regulatory returns and discuss banks’ IT systems to assess effectiveness and capacity. - The assessment feeds into the “I” component of supervisory ratings—evaluating whether MIS is implemented throughout the bank, timely accessible to board and senior management, and produces reliable and meaningful comprehensive information. ### New products and major initiatives (EC8) - Article 33 of the Comprehensive Risk Management Guidelines requires policies and processes to assess risks in new products, material modifications, and major management initiatives; major activities require board or specific board committee approval. - Article 15 of the Guidelines on Financial Innovation requires board and senior management to regularly assess and approve financial innovation policies and limits. - Supervisory practice: - Onsite examinations review policies, board and committee minutes, approvals, and post-launch reviews. - CBRC’s new product approval process involves extensive engagement to assess product features, inherent risks, controls, and governance. ### Risk management function, independence, and internal audit (EC9 & EC10) - Article 84 of the Corporate Governance Guidelines requires banks to establish an independent risk management function with authority, resources and access to the board. - Article 5 of the Guidelines on Internal Audit for Commercial Banks requires risk management functions to be subject to internal audit reviews. - Supervisory practice: - Onsite examinations emphasize independence of risk management, segregation of duties, reporting lines, and direct reporting to board and senior management; corrective actions are required if independence is lacking. - Article 15 of the Comprehensive Risk Management Guidelines requires larger/complex banks to have a Chief Risk Officer (CRO) who reports directly to the board and risk management committee, is senior management, and is independent of business functions. - Removal of CRO requires prior approval of the board, public disclosure, and reasons reported to and reviewed by CBRC. ### Supervisory standards on major risk types (EC11) - CBRC has issued regulatory guidelines addressing credit risk, market risk, liquidity risk, operational risk and interest rate risk in the banking book. - Relevant cross-references: CPs 17 and 22 to 25. ### Contingency arrangements, recovery and resolution (EC12) - Article 40 of the Consolidated Management and Supervision Guidelines requires periodic stress tests at group level and formulation of detailed contingency plans based on results. - Article 83 requires development and regular updating of group-level recovery plans integrated into governance and risk management; formulation and implementation are subject to supervisory review. - Articles 35 and 36 of the Comprehensive Risk Management Guidelines require contingency plans for emergencies and crises and updating recovery plans based on risk profile and systemic importance. - Article 25 of the Guidelines on Stress Tests of Commercial Banks and Article 129 of the Capital Rules stipulate use of stress test results in contingency plans. - Supervisory practice: - CBRC reviews board and risk committee minutes, internal risk reports, interviews senior managers and board members, and assesses scenario severity, assumptions on sources of funds under stress, and realism of assumptions; banks are required to incorporate CBRC comments. - For G-SIBs (Bank of China (BOC), Industrial and Commercial Bank of China (ICBC), Agricultural Bank of China (ABC), China Construction Bank (CCB)), CBRC requires annual recovery and resolution plans (RRPs) submission; CBRC suggests extending this requirement to other large domestically systemically important banks. - CBRC has set up a cross-border crisis management group (CMG) for each G-SIB comprising senior officials from national authorities (CBRC, MOF and PBC) and some foreign authorities to review RRPs at least once a year. - Recovery plans are reviewed by PBC and CBRC; assessment covers governance, critical business functions, indicators for triggering crisis actions, stress test scenarios, and recovery options. CBRC review teams include supervision, legal, prudential policy bureau and international department representatives. ### Stress testing (EC13) - The Stress Test Guidelines (revised 2014) require bank- and group-level stress test frameworks commensurate with risk profile and systemic importance (Article 6) and emphasize stress tests’ role in assessing asset quality, profitability, capital level and liquidity position and in setting risk appetite and capital/liquidity plans (Article 7). - Stress Test Guidelines detail expectations on governance, methodology, process, scenario design, and internal validation and assessment; Articles 42 and 43 set out CBRC’s supervisory reviews and industry-wide stress tests. - Other supervisory requirements on stress tests appear in the Comprehensive Risk Management Guidelines, Consolidated Management and Supervision Guidelines, the Capital Rules and the Liquidity Risk Rules. - Supervisory practice: - CBRC has organized multiple stress tests, including major risk-type and targeted tests on real estate credit risk and liquidity risk, focusing on systemic risk identification and contagion. - Some large and medium-sized banks conduct internal full-scope or targeted stress tests; banks report stress testing has become important amid global and domestic uncertainties. - Supervisors review stress test design, assumptions, transmission mechanisms, data sources, results and management actions; reviews often accompany contingency and recovery plan assessments. - Recommendation: CBRC and banks should further enhance robustness of stress testing programs, including scenario design, stress parameters and assumptions, stress testing techniques and interaction of risks under stress. ### Internal pricing and performance measurement (EC14) - Article 39 of the Comprehensive Risk Management Guidelines requires banks to account for risk strategy, risk appetite, risk limits and risk management policies in capital and operation management, specifically internal pricing, performance measurement, and new product approval for significant activities. - Article 116 of the Capital Rules requires designation of relevant departments to perform capital management duties including developing frameworks for internal capital measurement, allocation and risk-adjusted return calculations. - Supervisory practice: - Onsite examinations review policies and procedures to assess whether banks account for relevant risks in internal pricing, performance appraisal and new product approval. - CBRC found the majority of banks account for relevant risks in these processes; examples include internal funds transfer pricing (FTP) that considers product maturity mismatch, interest rate option, special product features, liquidity gaps, and interest rate sensitivity; FTP is adjusted to guide business portfolio changes and performance appraisal balances risks and benefits. ### Assessment summary and observations (Principle 15) - Assessment: Largely Compliant - Observations: - Significant progress since previous assessment: five large banks moved to advanced approaches for capital measurement; ICAAP and stress tests are important parts of risk management. - Risk management capabilities vary across large and medium-sized banks according to scale and complexity; evolution in managing credit, market, liquidity and operational risks noted. - Challenges remain in full enterprise-wide risk integration—particularly for banks with cross-regional activities, diverse products, or non-standard credit; some banks still working on full compliance with Comprehensive Risk Management Guidelines, IT systems, aggregating non-standard credit and overseas exposures. - Supervisory focus should continue on whether banks fully adopt enterprise-wide approaches and identify, monitor and manage risk interactions. - Recommendation reiterated to extend annual RRP requirement beyond the four G-SIBs to other large domestically systemically important banks. ### Capital Rules and capital adequacy (Principle 16 — EC1) - In June 2012, CBRC issued the Capital Rules of Commercial Banks (Provisional), which came into effect on January 1, 2013. The Capital Rules have 10 chapters with 17 annexes encompassing the core requirements of Basel II and III. - The Capital Rules apply to all banks operating in China; Article 2 states these rules apply to commercial banks established within the territory of the People’s Republic of China. - Chapters 2 and 3 of the Capital Rules establish scope, definition of capital and thresholds for prescribed requirements. *Source: cr17403 - Chapter 7 of the Capital Rules sets out that a bank shall establish sound risk management systems and robust ICAAPs, formulate capital plans and robust capital management (PDF).* ### Chapter 2 establishes that minimum requirement of common equity tier 1 (CET1) ratio shall ### Chapter 2 establishes that minimum requirement of common equity tier 1 (CET1) ratio shall ### Capital requirements and buffers - Minimum requirement of common equity tier 1 (CET1) ratio shall not be less than 5 percent (compared to 4.5 percent in Basel III). - Minimum requirement of Tier 1 ratio no less than 6 percent. - Minimum requirement of total CAR no less than 8 percent. - Capital conservation buffer: 2.5 percent, to be met with Common Equity. - Countercyclical capital buffer: 0-2.5 percent, to be met with Common Equity. - SIB capital surcharge: 1 percent, to be met with Common Equity. - CBRC may impose Pillar II capital add-on to individual banks based on their risk profiles and risk management capacities, based on the ICAAP and the supervisory review process. - Leverage ratio requirement: 4 percent (above the Basel III requirement of 3 percent). Key summary statistics (end-2015, in practice) - Average CAR: 13.45 percent. - CET1 CAR: 10.91 percent. - Average leverage ratio: 6.33 percent. ### Definition of capital, risk-weighted assets (RWAs), and alignment with Basel standards - Chapter 3 (Definition of Capital) and Annex 1 (Criteria for Inclusion of Capital Instruments of the Capital Rules) set out eligibility criteria to ensure capital components are defined based on loss-absorbency. - Supervisory Guidance on Capital Instruments Innovation of Commercial Banks clarified eligibility criteria to insure loss-absorbency of Additional Tier 1 and Tier 2 capital instruments. - Chapter 4 (Calculation of Credit RWAs), Chapter 5 (Calculation of Market RWAs) and Chapter 6 (Calculation of Operational RWAs) set criteria for calculation of credit risk, market risk and operational RWAs respectively, further detailed in the Annexes to the capital rules. - At least for internationally active banks, the definition of capital, the risk coverage, the method of calculation and thresholds for the prescribed requirements are not lower than those established in the applicable Basel standards. - China has adopted the Basel III framework, including the option for banks to use the advanced approaches for credit and market risk. - The definition of capital, the risk coverage and method of calculation and thresholds for the prescribed requirements are aligned with the Basel standards. Regulatory consistency assessments - In September 2013, BCBS released the report on its Regulatory Consistency Assessment Program (RCAP) of China, grading China’s implementation as ‘Compliant’. - Among the 15 components of the assessment, 13 were rated as ‘compliant’, including scope of application, transitional arrangement, definition of capital, credit risk (IRB approach), credit risk (securitization), counterparty credit risk, market risk (standardized approach), market risk (IMA), operational risk, capital buffer (conservation buffer and countercyclical capital) and Pillar II supervisory review. - Credit risk (standardized approach) and Pillar III disclosure were graded as “Largely Compliant”. - Non-material deviations on credit risk related to fixed risk weights for sovereign, banks and PSEs, and treatment of past due loans and eligible collateral, including debt securities issued by foreign banks and PSEs. - Pillar III deviations related to lack or requirement to disclose certain information, such as credit quality, securitization and employees remuneration; CBRC reported intent to revise disclosure framework expecting a new set of disclosures by mid-2017. - In 2016, BCBS released its RCAP report on G-SIB framework (G-SIB RCAP), in which China is graded as compliant. ### Supervisory powers, Pillar II and capital add-ons - The supervisor has the power to impose a specific capital charge and/or limits on all material risk exposures, including risks not adequately transferred or mitigated through transactions (e.g. securitization transactions). - Under the Capital Rules, CBRC has the power to impose Pillar II capital add-ons to ensure full coverage of risks; such add-ons can include specific capital requirements for certain asset portfolios and for individual banks based on supervisory review. - For banks without an adequate ICAAP or whose ICAAP fails to meet requirements, CBRC can apply Pillar II add-ons based on risk assessment. - Article 51: credit RWAs are the sum of credit risk-weighted on- and off-balance sheet assets in the banking book. - Article 53: when calculating risk-weighted off-balance sheet RWAs, a bank shall first use CCFs to convert off-balance sheet items into on-balance sheet credit exposure equivalents, then calculate RWAs as applicable to on-balance sheet assets. - CCFs are specifically provided in Article 71 and Annex 2. - Since implementation of the capital rules in 2013, CBRC conducted comprehensive assessments examining CAR accuracy and capital management, ensuring full coverage of on- and off-balance sheet risk exposures. - In practice, so far, Pillar 2 add-ons have been mostly used for the largest banks operating in China. ### Risk sensitivity, systemic importance, and dividend policy - Introduction of Basel III strengthened the overall capital framework, reflecting banks’ risk profile and systemic importance and aiming to constrain leverage build-up through capital conservation buffer, countercyclical capital buffer, SIB surcharge, the leverage ratio and full implementation of ICAAP within supervisory review. - On certain components, namely CET1 and the leverage ratio, CBRC adopted a more stringent approach compared to Basel III. - Discussions on implementation of a D-SIBs methodology have started. - Despite increased capital levels, CBRC expects banks to maintain a relatively low dividend distribution ratio. - In 2014 and 2015, distribution ratio generally stayed at around 30 percent. - Large banks have lowered their dividend payout ratio in recent years, on average from 35 percent to 30 percent. ### Use and approval of banks’ internal models and advanced approaches (EC5) - Chapter 4, Chapter 5 and Chapter 6 set out rules for IRB approach to credit risk, IMA to market risk and AMA to operational risk (although no bank has been approved thus far for the use of AMA). - Detailed requirements for advanced approaches are listed in Annex 3, 4, 5, 6, 7, 9, 11, 12, 14 and 16. - Use of internal assessments of risks as inputs to regulatory capital calculation is contingent upon CBRC approval. - Annex 14 – Supervisory Review of Advanced Capital Measurement Approaches details requirements for application, CBRC approval process, parallel run arrangements (minimum of 3 years) and ongoing supervisory review. - Prior application, banks must demonstrate preparation including governance, policies, measurement models, data and information systems, a self-assessment report of compliance, results of at least two quantitative impact studies, validation and auditing reports (Annex 14 – 1.2.1). - CBRC assessment must analyze the role of advanced approaches in improving risk management, presence of self-improving mechanisms, compliance with supervisory requirements, and sufficiency/effectiveness of validation (Annex 14 - 2.1.2). - CBRC can impose conditions on approvals and has granted conditional approval in cases with non-substantial shortfalls, extending the parallel run period if needed (Annex 14 (2.17)). - Material adjustments to approaches (definitions, parameters, models) require CBRC approval (Annex 14 (4.2)). - Cessation of the use of internal assessments is contingent upon CBRC approval (Article 46). - Annex 14 (4) requires annual submission of a validation report (4.3) and permits in-depth supervisory review of validation procedures (4.4). If severe deficiencies persist, CBRC can revoke approval. Implementation status and supervisory capacity - So far, six banks have been granted approval to adopt advanced approaches (IRB for credit risk, IMA for market risk, exclusive of AMA for operational risk): Industrial and Commercial Banks of China (ICBC), Agricultural Bank of China (ABC), Bank of China (BoC), China Construction Bank (CCB), Bank of Communications and China Merchants Bank (CMB). - CBRC reported that a few other banks are in the process of qualifying for the advanced approaches. - Between 2007 and 2009 CBRC issued guidelines to support banks’ preparation; applications from 6 banks were received in 2009. - From 2009 to 2014 CBRC performed three rounds of supervisory assessments (pre-assessment, follow-up assessment and assessment for approval); in April 2014 CBRC granted approvals. - CBRC established a specific team and pool of experts for oversight; the expert team has around 60 core members responsible for different modules of advanced capital measurement approaches, covering on-site assessment of risk measurement models and use test. ### Forward-looking capital management, ICAAP and stress testing (EC6) - Chapter 7 – Internal Capital Adequacy Assessment lays down comprehensive provisions on capital management including governance, comprehensive risk assessment, capital planning, monitoring and reporting. - Article 105 requires banks to establish bank-wide risk management framework and a sound internal capital adequacy assessment process (ICAAP), develop a clearly-defined risk governance structure, prudently assess various risks, capital level and capital quality, develop capital planning and capital adequacy management plan, ensuring adequate capital to support risks and ongoing business operations. - Article 106 expects ICAAP to ensure major risks are identified, measured/assessed, monitored and reported; capital levels are commensurate with risk appetite and risk management capacity; capital planning aligns with operational risk profile and long term strategy. - Article 107: a commercial bank shall use stress test as a key element in ICAAP; stress test shall cover material risks of various business lines, taking into account economic cycle impact on the bank’s CAR. - Section 3 of Chapter 7 sets criteria for identification and assessment of major risks, and risk aggregation policies and methods. Annex 13 provides specific requirements on risk assessment and stress test. - Article 108: a bank shall use ICAAP in internal management, capital budgeting and allocation, credit decision-making and strategic planning. - Article 125: a bank shall develop capital planning considering risk assessment results, future capital needs, regulatory capital requirements and capital accessibility. - Capital planning shall at least cover the internal capital targets for 3 years (Article 125). - Article 129: via stringent and forward-looking stress test, a bank shall calculate capital demand and availability under different stress scenarios and develop contingency plans to meet unexpected capital demand. - Section 4 of Chapter 7 sets requirements on capital planning, stress test methods and capital contingency arrangements. - Banks are required to perform the ICAAP on an annual basis and promptly review and update it in the event of major changes in operating conditions, risk profile and external environment (Article 110). *People’s Republic of China — extracted content from the specified chapter of the source PDF* ### Chapter 8 Supervisory Review of the Capital Rules specifically sets out details on the ### Chapter 8 Supervisory Review of the Capital Rules specifically sets out details on the ### Supervisory review process, Pillar II and supervisory actions - Banks are divided into 4 categories according to their fulfillment of capital adequacy requirements; each category is subject to specific supervisory actions. - Banks with weaker capital base are subject to more intensified supervisory measures. - The Notice on Strengthening Supervisory Review of the Capital Adequacy Ratio of Commercial Banks: - pinpoints criteria of ICAAP, Pillar II capital requirements and operational procedures; - where a bank does not have ICAAP or its ICAAP fails to meet the criteria, CBRC will perform supervisory assessments to determine Pillar II capital add-ons. - For the top 5 large banks, CBRC requires them to submit ICAAP report every year and set different capital add-ons under Pillar II framework. - Targeted on-site examinations have been conducted for selected banks. - CBRC adopts a proportional approach taking into account the level of complexity and development of various types of banks: - largest banks: fully functional ICAAP framework; - middle size banks: in the process of improving their processes; - small banks: at a very early stage. - For small and mid-size banks, after issuance of the capital rules and given rapid growth, CBRC took three major initiatives targeted to the segment: - requiring banks to establish mid-term capital plans (two years); - ensuring capital calculations under Pillar 1 were correct; - enhancing capital base by restricting dividends. ### Assessment of Principle 16 - Assessment: Compliant - Key points: - China has implemented Basel III, setting higher requirements for CET1 and leverage ratio. - Capital is calculated on a solo and consolidated basis. - CBRC has the authority to impose additional capital requirements on individual banks, as deemed necessary. - CBRC requires, in principle, the ICAAP to be implemented for all banks, in a proportionate basis. - Discussions on defining a D-SIBs methodology are under way towards establishing a formal D-SIBs framework. - Recommendation: next step should include commensurate efforts toward mid-sized banks, irrespectively if joint stock, city or rural banks. - Note: For a detailed discussion and recommendations on stress testing please refer to CP 15. ### Principle 17 — Credit risk (overview) - Principle 17 objective: supervisor determines that banks have an adequate credit risk management process that takes into account their risk appetite, risk profile and market and macroeconomic conditions; covers full credit lifecycle including credit underwriting, credit evaluation, and ongoing management of loan and investment portfolios. - Footnotes: - Principle 17 covers the evaluation of assets in greater detail; Principle 18 covers the management of problem assets. - Credit risk may result from on-balance sheet and off-balance sheet exposures, including loans and advances, investments, inter-bank lending, derivative transactions, securities financing transactions and trading activities. - Counterparty credit risk includes credit risk exposures arising from OTC derivative and other financial instruments. ### EC1 — Laws, regulations or the supervisor require banks to have appropriate credit risk management processes - Regulatory scope: - requirements cover credit granting, due diligence, asset classification, impairment provisioning, and management of on- and off-balance sheet credit activities. - Key legal and regulatory references described: - Article 3 of the Comprehensive Risk Management Guidelines and Article 1 in Annex 13 of the Capital Rules require banks to establish a comprehensive risk management system and adopt quantitative and qualitative measures to identify, measure, evaluate, monitor, report, and control or mitigate various risks, including credit risk. - Comprehensive risk management elements include: (a) risk governance structure, (b) risk management strategy, risk appetite and limit, (c) risk management policies and procedures, (d) management information system and data quality control mechanism, and (e) internal control and auditing system. - Annex 13 of the Capital Rules further specifies sound comprehensive risk management coordinated with ICAAP, including: (a) effective oversight by the board and senior management, (b) appropriate risk management policies, procedures and limits, (c) comprehensive and timely risk identification, measurement, monitoring, mitigation and control, (d) sound management information system and (d) comprehensive internal controls. - Supervisory practices: - assessment of banks’ credit risk management is a key focus of CBRC’s supervisory rating; - CBRC’s assessment is based on both offsite reviews and onsite examinations. - Offsite reviews: meetings with banks, analysis of data submitted, review of banks’ risk management policies and procedures and risk management reports to facilitate trend analysis and identify heightened credit risk. - Onsite examinations: full scope or targeted examinations of credit risk management processes commensurate with bank’s risk appetite and profile. - CBRC assessment: most commercial banks have established credit risk management systems consistent with their risk characteristics, reflecting risk appetite, setting risk limits, and restricting selected industries and geographic regions. ### EC2 — Board and senior management responsibilities and supervisory evaluation - Board responsibilities as set out: - Article 11 of the Comprehensive Risk Management Guidelines and Article 19 of the Corporate Governance Guidelines: Board has ultimate responsibility for comprehensive risk management, establishing risk tolerance and policies, fostering risk management culture, developing risk management strategy, setting risk appetite and limits, approving management policies and procedures for large risk exposures, reviewing comprehensive risk management reports and disclosures. - Board shall set up specialized committees where necessary, including the risk management committee, to conduct regular assessments and advise on improvement. - Senior management responsibilities as set out: - Article 14 of the Comprehensive Risk Management Guidelines: senior management responsible for implementing risk management and Board decisions, including: - (a) developing a comprehensive risk management framework with segregation of responsibilities and inter-department coordination and checks and balances mechanism; - (b) establishing clear implementation and accountability mechanisms and ensuring risk management strategy, risk appetite and limits are fully communicated and effectively implemented; - (c) setting risk limits in line with the risk appetite approved by the Board; - (d) developing and regularly review the risk management policy and procedures; - (e) assessing the management of overall risk and various material risks and reporting to the Board; - (f) establishing comprehensive management information system and data quality control; - (g) monitoring exceptions to risk appetite and limits as well as violations and taking actions as authorized by the Board. - Article 10 of the Internal Control Guidelines sets out similar requirements. - Supervisory evaluation: - CBRC assesses whether Board and senior management have fulfilled these responsibilities through onsite examinations on corporate governance and internal control. - Examinations evaluate Board’s understanding of credit risk management, development of risk appetite and strategies, and oversight of senior management. - Supervisors also review banks’ major credit risk management policies and meeting minutes to determine whether these have been duly reviewed and approved by the Board. - Examination reports have highlighted concerns where certain credit policies have not been duly approved at authorized levels. - The assessment of Board and senior management performance is a key input to the “Management” component of CBRC’s supervisory ratings. - Supervisory actions for imprudent activities or non-compliance: - require suspension of business in case of non-compliance with regulations; - urge bank to take corrective actions: more prudent business strategies, improving policies and procedures, re-engineering business processes; - impose penalties and hold relevant persons and managers accountable. ### EC3 — Policies and processes establishing an appropriate credit risk environment - EC3 expectations include requirements for: - (a) well documented and effectively implemented strategy and sound policies and processes for assuming credit risk, without undue reliance on external credit assessments; - (b) well defined criteria and policies/processes for approving new exposures and for renewing and refinancing existing exposures, with appropriate approval authority defined by size and complexity; - (c) effective credit administration policies including ongoing analysis of borrower’s ability and willingness to repay, monitoring of documentation, legal covenants, collateral and other mitigants, and appropriate asset grading or classification system; - (d) effective information systems for accurate and timely identification, aggregation and reporting of credit risk exposures to the Board and senior management; - (e) prudent and appropriate credit limits consistent with risk appetite, risk profile and capital strength, communicated to relevant staff; - (f) exception tracking and reporting processes ensuring prompt action at appropriate senior management or Board level; - (g) effective controls around use of models, including quality, reliability and relevancy of data and validation procedures. - Description and findings re EC3 — regulatory and supervisory provisions: - (a) Article 20 of the Comprehensive Risk Management Guidelines: banks shall develop clear risk management strategy and evaluate its effectiveness at least annually; Article 26 prescribes aspects to be included in banks’ risk management policies and procedures. - Articles 1 and 3 of the Notice on Regulating the use of External Credit Ratings and Article 1 in Annex 17 of the Capital Rules: banks shall prudently use external credit ratings including prudent selection of eligible external rating agencies, and the use of more conservative data from at least two external rating agencies. - (b) Articles 23 to 25 and 28 of the Due Diligence Guidelines on Credit Issuance: requirements in the course of granting credit, including review of financial statements, qualitative factors and secondary source of repayment and analysis of related risks. Article 3 of the Notice on Further Enhancing Credit Risk Management requires banks to specify detailed criteria, policies and procedures for approval of new credit, roll over of existing loans and revolving credit, and define levels of approval authority according to size and complexity. - (c) Article 41 of the Due Diligence Guidelines on Credit Issuance: after granting credit, banks shall continue to monitor factors impacting repayment on an ongoing basis, including borrower’s fulfilment of contract, project progress, changes in customer’s legal and financial status, and quality and value of collaterals. Annex 9 of the Capital Rules: banks shall comprehensively understand their on-and off-balance sheet securitization exposures and risk characteristics of underlying assets. - (d) Various Rules and Guidelines require effective information systems for risk identification, aggregation and reporting to board and senior management. These include Articles 41 and 42 of the Comprehensive Risk Management Guidelines, Article 27 of the Internal Control Guidelines, and Annex 13 of the Capital Rules. Specific references to credit risk are set out in Article 2.4 of [text continues in source]. *People’s Republic of China — Chapter 8: Supervisory Review of the Capital Rules (excerpts).* ### Annex 5 of the Capital Rules. ### Annex 5 of the Capital Rules ### Risk limits, models and supervisory examinations - The Comprehensive Risk Management Guidelines require banks to have policies and processes for risk limit management, rules for setting and adjusting limits, and handling and reporting of exceptions. Risk limits should be set according to established risk appetite and take into account capital, risk concentration, etc and be fully communicated to staff. - Annex 5 of the Capital Rules requires commercial banks to be capable of identifying model limitations, checking and controlling model errors and improving model performance. Banks should understand underlying model limitations and make adjustments to model outputs where necessary. - Numerous onsite examinations have been conducted in recent years involving review of credit controls: - Generally, two thirds of CBRC’s onsite examinations in a year are related to credit risk, half of which are directly relevant to credit risk, including specific or comprehensive credit risk examinations. - In 2015, among all onsite examinations conducted by CBRC, 54 were thematic ones dedicated to credit risk examinations, and 121 covered credit risk management, among other areas. - Based on CBRC’s approach, all banks are subject to a full scope inspection at least once every 5 years and full scope inspections would have included credit risk and asset quality. - CBRC prioritizes banks for examination using offsite assessments of banks’ quality of credit risk management (including corporate governance, policy, process, system, asset classification and adequacy of provisions) and gives more attention to banks with exposures to industries, regions, customers and business activities of heightened risks. ### Onsite exam focal points and supervisory expectations - Examiners focus on: - Organizational structure of the credit business, clear segregation of duties, effective checks and balances, and independent risk management with adequate resources and expertise. - Credit risk management policies that reflect board-approved strategies and risk appetite. - Comprehensive credit assessment using comprehensive sources of information. - Centralized credit management system with established processes for risk limit setting and changes, monitoring, reporting and handling of limit excesses or deviations. - Clearly established and differentiated credit approval authorities according to risk levels, with penalties for non-compliance. - Rigorous credit underwriting, loan review, loan monitoring and collateral management procedures with clear documentation requirements. - Timely risk-based asset classification in accordance with regulatory requirement. - Risk management systems capable of monitoring, managing and reporting credit risks and detecting deviations or credit limit excesses; providing adequate and timely information to support credit decisions. - Clear credit risk reporting requirements so senior management can obtain firm-wide and portfolio-specific risk information. - For banks adopting advanced approaches under the Capital Rules, models must be subject to regular checks and validation for ongoing accuracy and prudence. ### Observed deficiencies and supervisory actions (small banks) - CBRC observations: - Large and medium-sized banks: credit risk management practices generally well established with not many issues. - Small banks: noted deficiencies including: - (a) Credit risk management of bond investment and other financing activities not consistent with that for conventional credit facilities. - (b) Weaknesses in managing concentration risk and determining group customers; difficulty comprehensively reviewing affiliation of group customers. - (c) Use of loan proceeds not properly monitored, resulting in misappropriation of some banks’ funds by borrowers. - Supervisory stance on lending to government-encouraged sectors: - CBRC’s first consideration is that banks must exercise prudence and sound credit judgement in lending to such sectors; certain loan growth targets are not strictly enforced by CBRC. - CBRC encourages banks to diversify away from large state-owned enterprises and to improve risk differentiation and reduce concentration risks. - For SME lending CBRC expects banks to have necessary framework, policies and processes prior to commencement (e.g., specialized credit teams, more detailed credit evaluation and monitoring). CBRC works with other public agencies to explore sharing data on small proprietorships or enterprises to facilitate banks’ risk identification. ### System-wide trends and supervisory priorities - There has been an increase in scale and complexity of banks’ credit risk origination activities since the previous assessment: - System-level average asset growth: 15% (year not specified in excerpt). - Some small- and-medium-sized banks continue to register more than 20% growth in assets annually. - Shift towards non-standard credit activities such as investments in structured products, off-balance sheet activities, interbank investments. - CBRC issued late‑2016 guidelines and consultation papers (Comprehensive Risk Management Guidelines; Guidelines on Further Enhancing Credit Risk Management; Management of Off-balance sheet Business) to address these emerging risks. ### EC4 — Monitoring total indebtedness and risk factors - The Due Diligence Guidelines on Credit Issuance require oversight of borrowers’ total indebtedness and risk factors that may result in default, including unhedged foreign exchange exposures. - Guidelines on Credit Risk Management of Corporate Groups require adequate information on borrowers’ indebtedness, affiliated parties, guarantees and litigation before extending credit. - Notice on Further Enhancing Credit Risk Management stresses information sharing among banks, in particular on non-standard or non-traditional financing activities. - CBRC upgraded and launched the Obligor Risk Monitoring System (ORMS) in 2013 to collect and collate information on banks’ large credit and retail loan defaults; ORMS captures on-and off-balance sheet credit facilities, detailed financial indicators, and collateral and guarantor information. - The national Credit Reporting system established by PBC facilitates banks checking borrowers’ credit status and history online. ### EC5 — Independence and arm’s length credit decisions - Article 40 of the Commercial Bank Law prohibits unsecured loans to related parties; secured loans to related parties must be on an arm’s length basis. Article 41 grants banks the right to refuse entities or individuals that force loan extensions or guarantees. - Related Party Transaction Rules require related party transactions to be undertaken in accordance with business principles and not be more favorable than comparable transactions with non-related parties. - CBRC supervisors check that banks: - Establish policies and procedures for related party transaction management; - Ensure independence of credit approval functions and controls to avoid conflicts of interest; - Comply with regulatory limits on related party transactions; - Have related party transactions reviewed and approved by the Board or a related party transaction control committee. - Significant related party transactions are reported to CBRC for review. - Note: dealing with potential conflict is challenging where banks are owned by government bodies with commercial interests (see CP 20). ### EC6 — Board/senior management approval thresholds for large or risky exposures - Rules on Authorization and Underwriting Management and Guidelines on Implementing Standardized Credit Issuance System require banks to set credit limits and authority levels. - Article 3 of CBRC’s Notice on Further Enhancing Credit Risk Management requires that total exposures to corporate group borrowers exceeding 10% of a bank’s capital or total exposures to single borrower exceeding 5% of capital be treated as large exposure and approved by the board or senior management. - CBRC reviews banks’ policies and implementation of differentiated credit approval authorities and treats unauthorized transactions as important risk signals; certain targeted onsite examinations of large loans are conducted. ### EC7 — Supervisor access to credit and investment portfolio information - Banking Supervision Law (Articles 33, 34 and 46) and Commercial Bank Law (Articles 61, 62 and 75) grant CBRC the right to require submission of information and to conduct onsite examinations, including balance sheets, income statements, other financial records, operation and management information and audit reports. - In practice, CBRC has full access to banks’ internal management and accounting information and relevant bank officers involved in credit decisions or processes. ### EC8 — Stress testing credit risk - Article 17 of the Stress Testing Guidelines requires comprehensive stress tests covering major risks and all major on-and off-balance sheet activities, considering interactions and correlation between risk factors. - Article 31 sets out credit risk stress scenarios including: declining macro-economic growth of domestic and international economies; large downward fluctuations of real estate prices; deterioration of credit quality and quality of real estate collaterals; credit downgrading or default of concentrated borrowers and their main counterparties; concentrated defaults in certain industries; country risk or transfer risk in international exposures; and other events with material effects on credit risks. - Banks conduct regular stress tests per supervisory requirements and participate in CBRC-organized stress tests. Recent CBRC stress tests included: - 2014: overall credit risk, targeted stress tests for real estate loan risk and liquidity risk. - 2015: stress test covering credit risk, market risk and liquidity risk. ### Assessment of Principle 17 (Credit Risk) - Assessment: Largely Compliant - Key comments: - Credit risk is the most significant risk in the Chinese banking sector. The legal and regulatory framework is comprehensive, with specific Notices and consultations issued to address emerging risks (including off-balance sheet activities). - CBRC’s offsite surveillance benefits from enhanced data gathering and has identified credit risk trends and vulnerabilities for action. - Onsite examinations have become more focused on non-credit assets and loan classification and provisioning. - Challenges remain in ensuring supervisory expectations are communicated and implemented across a large, diverse and increasingly complex banking sector. Banks required reminders and scrutiny from CBRC to subject non-standard activities to similar credit risk measurement/management and regulatory requirements as standard credit activities. - CBRC should consider developing comprehensive guidance on credit risk management in line with international standards to ensure supervisory expectations and minimum standards are well understood. ### Principle 18 — Problem assets, provisions and reserves (overview) - Principle 18: Supervisor determines that banks have adequate policies/processes for early identification and management of problem assets and maintenance of adequate provisions and reserves. - Reserves defined as “below the line” non-distributable appropriations of profit required by a supervisor in addition to provisions (“above the line” charges to profit). ### EC1 — Laws/guidance on identifying/managing problem assets and regular review - Key legal/guidance provisions: - Article 13 of the Guidelines on Risk-based Loan Classification: banks must formulate/update policies and procedures for risk-based asset classification and establish effective credit administration and internal controls to ensure independence, continuity and reliability of loan classification. - Article 5: banks must classify loans into at least five categories: normal, special mentioned, substandard, doubtful and loss; the last three are defined as non-performing loans (NPLs). Article 17: these are minimum requirements; policies/procedures/methodology must be commensurate with scale and complexity. - Article 14: banks shall classify all loans at least quarterly and as and when material changes occur. - Article 16: internal audit must review loan classification policies/procedures at least annually. - Provisioning: - Article 8 of the Guidelines on Loan Loss Provisioning: banks shall establish a prudent loan loss provisioning system based on risk-based loan classification and set aside provisions in a timely manner. ### EC2 — Supervisor review of banks’ grading/classification and provisioning processes - CBRC’s Supervisory Ratings consider asset quality, classification and provisioning. - CBRC reviews banks’ loan classification and provisioning policies/procedures and adequacy of provisions through offsite surveillance and onsite examinations. - Offsite: banks submit supervisory returns and reports on asset quality classification, impairment provisions and write-offs; supervisors analyze profiles and changes and hold supervisory meetings when significant changes arise. - Onsite: supervisors assess effectiveness of loan quality monitoring policies, classification, reporting, recovery steps, internal reviews, and adequacy of provisioning. CBRC does not rely on external auditors for this assessment but maintains communication with them. - Supervisory actions for deficiencies include risk alerts, correction requirements, heightened regulatory measures and administrative penalties where fraud is involved. ### EC3 — Off-balance sheet exposures included in classification and provisioning - Article 18 of the Guidelines on Risk-based Loan Classification: various assets other than loans, including direct credit substitutes of off-balance sheet items, are subject to loan classification. - Article 7 of the Notice on Further Enhancing Credit Risk Management: banks must reflect underlying credit risks of all on- and off-balance sheet (including non-credit) businesses and subject them to classification policies and procedures. - Banks submit supervisory returns including off-balance sheet items; CBRC monitors classification accuracy and urges external auditors to review off-balance sheet assets. ### EC4 — Timely provisions and realistic recovery expectations - Article 2 of the Guidelines on Loan Loss Provisioning: banks shall reasonably estimate possible loan losses and set aside provisions in a timely manner. - Article 8: banks must have a provisioning system including risk identification, provisioning assessment and write-off processes. - CBRC reviews adequacy and prudence of impairment evidence, present value computations, and grouping of homogeneous loans; write-offs are checked for compliance with rules and proper approval. - CBRC monitors monthly changes in NPLs, provisions and write-offs and holds tripartite meetings with banks and external auditors to assess realism of provisions and write-offs. ### EC5 — Early identification, oversight and testing for circumvention - Guidelines on Due Diligence in Credit Issuance require banks to monitor repayment factors on an ongoing basis and classify credits accurately; banks must take necessary steps to address problem credits. - General Rules for Loans (Article 33) require monitoring systems for loan quality and repayment of bad loans. - Guidelines on Risk-based Loan Classification: - Loans classified at least quarterly and when material changes occur. - Specific classification rules: - Loan at least “special mention” if principal or interest payment is overdue (Article 10). - Loan at least “substandard” if overdue for a certain period (typically 90 days per accounting rules) and interest ceases to accrue (Article 11). - “Doubtful” if borrower unable to pay principal and interest and a big loss will be caused without any doubt even if security executed (Article 5). - “Loss” if principal and interest cannot be recovered or only an extremely small part can be recovered after all measures/legal actions (Article 5). - Retail loans and small enterprises classification by past-due days (Article 8 of Guidelines on Risk-based Loan Classification for Small Enterprises) with a classification matrix by dpd (see source for full matrix). - Offsite supervision monitors migration of NPLs and factors affecting re-aging and reduction (collection, restructuring, transfer, conversion to equity). Unusual trends are followed up through interviews, onsite investigation and verification. - Given the rise in NPLs, CBRC intensified onsite examinations focusing on accuracy of classification and adequacy of provisions. - CBRC records: on average more than 200 onsite examinations per year, at least 80% have a credit risk focus, and 60% of which include a review of asset quality. - All banks are subject to a full scope inspection at least once every 5 years (2011–2016 all banks were inspected). - Examiners pay close attention to roll-over, restructuring, refinancing and upgrading of loans and focus on pass and special mention categories to identify slow downgrading. ### EC6 — Supervisor access to classification/provisioning information and documentation - Banking Supervision Law (Articles 33 and 34) provides CBRC full access to bank information for supervision. - Article 13 of Guidelines on Risk-based Loan Classification: banks must keep complete credit files for accurate classification. - Article 20: banks submit loan classification data per regulations. - Rules on Loan Loss Provisions: banks provide monthly information on loan loss provisions; supervisory authority monitors provision ratios monthly and investigates abnormal changes. - CBRC requires regular returns and has full access to loan files and asset quality reports. ### EC7 — Supervisor powers to require adjustments and remedial action - Articles 23 and 24 of Rules on Loan Loss Provisioning empower CBRC to issue risk alerts, require corrections, and take supervisory actions if provisioning falls below regulatory requirement; administrative penalties apply if provisions achieved by fraud. - Guidelines on Loan Loss Provisioning prescribe minimum provisioning per loan category: - Pass: 1% - Special Mention: 2% - Substandard: 25% - Doubtful: 50% - Loss: 100% - Rules on Loan Loss Provisions set minimum requirement for loan provision at 2.5% and minimum provision coverage ratio (loan loss provisions/NPL balance) at 150%. Banks must maintain the higher of the two requirements. - Offsite and onsite reviews identify inadequate classifications/provisions; CBRC can require adjustments, root cause analysis, and remedial actions including business restrictions, dividend restrictions, replacement of senior management, and deducting provision shortfalls from regulatory capital. ### EC8 — Valuation of risk mitigants and collateral - Notice on Further Enhancing Credit Risk Management (Article 8) requires banks to formulate risk mitigation policies, regularly assess effectiveness of risk mitigants, attend to authenticity, legitimacy and enforceability of collateral/pledges, prudence of valuation, completeness of documents and rigor of contractual clauses, and consider macro and industry impacts. - Annex 6 “IRB Approach: Supervisory Requirements on Risk Mitigation” to the Capital Rules sets requirements on eligible pledges and collateral, and requires pledge/collateral management systems with policies, valuation approaches, management processes and information systems; valuation must follow objectivity, independence and prudence. - Chinese Accounting Standard No. 22 – Financial Instrument Identification and Measurement: banks estimate recoverable value of impaired loans by discounting future cash flows; market value of collateral is discounted and recognized as a secondary source of repayment. - CBRC estimates 60% of corporate loans are secured, of which 50% are secured by real estate. - CBRC reviews policies/procedures for valuation, frequency, staff expertise and external valuers’ qualifications; CBRC’s specialist team is involved in validation, particularly LGD model validation. - CBRC had recently issued draft guidelines on collateral management for public consultation (governance, collateral quality, valuation methodology/frequency, concentration management, stress testing). ### EC9 — Criteria for problem asset identification and reclassification to performing - Guidelines on Risk-based Loan Classification: loans classified by likelihood of borrower making full payment; five categories (normal, special mention, substandard, doubtful, loss), with last three as NPLs. Restructured loans at least “substandard”. - Chinese Accounting Standard No. 22: financial asset impaired if future cash flow expected to reduce due to events after initial recognition and value can be reliably measured. - Notice on Further Enhancing Credit Risk Management (Article 6): NPL reclassification to performing requires: - All amounts due, including principal and interest, have been paid; - Principal and interest payments made according to contractual terms in the subsequent six months or two repayment periods, whichever is longer; - Continued payments in accordance with contractual terms are expected. - Reclassification requires approval of a bank’s Head Office or Tier-one branches authorized by the Head Office. ### EC10 — Board-level information on asset portfolio condition - Corporate Governance Guidelines (Article 67): senior management must provide comprehensive and accurate reports on operational performance, contracts, financial strengths, risk profile and business prospect to the Board in a timely manner. - Article 83: Board and its risk committee shall regularly attend risk profile presentations by senior management. - CBRC supervisors evaluate timeliness and adequacy of information provided to boards via review of board minutes and internal reports; meetings with boards are held when needed. ### EC11 — Individual item valuation/classification/provisioning for significant exposures - Chinese Accounting Standard No 22 (Article 43): significant financial assets subject to impairment test at individual level; insignificant assets may be tested individually or at portfolio level for homogeneous assets. - CBRC assesses that banks’ practice of subjecting significant exposures to individual valuation/classification/provisioning is adequate: corporate loans generally classified individually; personal loans and credit card overdrafts on a portfolio basis. Some banks set criteria for significant exposures and provision significant corporate NPLs individually. ### EC12 — Supervisor assessment of sector/system trends and adequacy of provisions - CBRC conducts ongoing offsite surveillance and analysis on monthly and quarterly basis using systems: - Risk Early-warning Analysis and Supporting System (REASS) for leading indicators and vulnerability indicators. - Examination & Analysis System Technology (EAST) which gathers bank-specific information during onsite examinations. - Obligor Risk Monitoring System (ORMS) which contains obligor data. - Trends and macro outlook are considered in supervision; attention given to credit risk profiles/trends of key customers, industries and regions. - CBRC adjusts supervisory intensity for banks with exposures to affected industries/regions/corporates and increases information requests, meetings, onsite examinations and stress testing (e.g., real estate loans). - CBRC issues risk alerts to banks or groups of banks based on offsite surveillance and onsite observations. ### Assessment of Principle 18 (Problem assets and provisioning) - Assessment: Largely Compliant - Key comments and data: - Given slower macro growth and structural adjustments, Special Mention loans and NPLs have increased since 2013 while provision coverage ratios have declined but remained higher than 150% at end 2016. - As of end 2016, rural commercial banks have higher NPL ratio than other banks. - Time series (2011–2016): - Special Mention: 2011 3.13% | 2012 2.92% | 2013 2.44% | 2014 3.11% | 2015 3.79% | 2016 3.87% - NPL: 2011 0.96% | 2012 0.95% | 2013 1.00% | 2014 1.25% | 2015 1.67% | 2016 1.74% - Provision Coverage over NPL: 2011 278% | 2012 296% | 2013 283% | 2014 232% | 2015 181% | 2016 176% - 2016 NPL ratio and provision coverage by bank type: - Large Commercial Banks: NPL ratio 1.68% | Provision Coverage 163% - Joint-stock Commercial Banks: NPL ratio 1.74% | Provision Coverage 170% - City Commercial Banks: NPL ratio 1.48% | Provision Coverage 220% - Rural Commercial Banks: NPL ratio 2.49% | Provision Coverage 199% - Foreign banks: NPL ratio 0.93% | Provision Coverage 250% - CBRC actions and focus: - CBRC intensified efforts through offsite surveillance and onsite examinations to ensure correct classification and provisioning. - Industry representatives confirm loan classification and provisioning have been a supervisory and external audit focus. - Recommendations / supervisory concerns: - Continue focus on accuracy of loan classification and provisions, particularly special mention and overdue loans to avoid delays in classifying non-performing loans and inadequate provisions. - Review the current loan classification allowance permitting loans more than 90 dpd to be classified as Special Mention when supported by collaterals; lack of clarity on what constitutes “good quality collateral” complicates assessment. CBRC estimates loans >90 dpd but classified as Special Mention are about 0.4% of total loans and attributable equally to: - (a) loans permitted under Guidelines for Small Enterprises (NPL when >180 dpd); - (b) loans with acceptable collaterals (liquid assets with good credit rating, independent valuation, realizable without loss); - (c) imprudent or incorrect loan classification practices for which administrative sanctions applied. - Review requirement permitting small enterprise loans to be classified as NPL only when >180 dpd, to assess whether this leads to slow downgrading and delayed detection of credit risk in micro-lending. ### Beginning of Principle 19 — Concentration risk and large exposures (selected findings) - Article 121 of the Capital Rules and Part 3, Annex 13: banks must establish criteria to identify, assess and monitor concentration risks across counterparties, regions, industries, collaterals, including on- and off-balance sheet items and contingent liabilities, and assess concentration under stress scenarios. - Guidelines on Credit Risk Management of Corporate Groups (Article 4) include on- and off-balance sheet activities (loan, trade finance, acceptance of bill, bill discounting, overdraft, factoring, guarantee, loan commitment and letter of credit) and require derivative trading and securities holdings to be incorporated into total credit lines. - Banks must establish information systems to aggregate exposures timely, identify concentration risks, monitor exposure limits and consider risk interactions (Article 131 and Annex 13 of the Capital Rules). Internal audit must cover continuity, reliability and safety of information systems (Article 16 of Guidelines on Internal Audit). - CBRC offsite reviews credit concentration reports; ORMS borrower information sharing aids identification of corporate groups. Onsite examinations assess management information system capability to aggregate, monitor, analyze and control risk concentrations. _Annex 5 of the Capital Rules (excerpts)._ ### Annex 13 of the Capital Rules provides that commercial banks shall establish bank-wide ### Annex 13 of the Capital Rules provides that commercial banks shall establish bank-wide ### Concentration risk management framework - Banks are required to set limits on concentration risks in line with risk appetite, capital base, assets, profit and overall risk profile. - The Board and senior management shall regularly review the profile of concentration risk to ensure effective management and control. - These requirements are also to be fulfilled at bank group level under the Consolidated Management and Supervision Guidelines. - CBRC requires banks to effectively manage concentration risks and maintain adequate Pillar II capital add-on. - CBRC issues risk alerts or supervisory letters where there are concerns of risk concentrations, particularly to sectors of higher risks. ### Management of large exposures (Corporate Groups Guidelines) - Article 7 requires risk management policies for lending to corporate groups including governance structures, criteria and exposure limit for a single corporate group, internal reporting procedures and assignment of responsibilities. - CBRC requires banks to obtain the approval of its board and senior management for credit extended to any corporate borrower group exceeding 10% of the bank’s capital and to single borrower exceeding 5% of the bank’s capital (“large exposures”). - Under the Commercial Bank Law, a bank’s total outstanding loans to a single borrower shall not exceed 10% of the bank’s capital. - Corporate Groups Guidelines stipulate that total credit exposures to a single corporate borrower group shall not exceed 15% of the bank’s capital. - Interbank limits: interbank lending (excluding interbank deposits for settlement and deducting assets with no risk weight) to a single incorporated financial institution shall not exceed 50 percent of the bank’s tier 1 capital; a bank’s outstanding interbank borrowings shall not exceed one-third of its total liabilities. - Recommendation: CBRC should review and adopt the BCBS large exposures interbank limits—reduce regulatory limit on a bank’s interbank exposures (excluding intraday interbank exposures) to 25% of its Tier 1 capital and establish a lower limit of 15% of Tier 1 capital on a G-SIB’s exposures to another G-SIB. - Regulatory application: These requirements are to be applied on a solo and on consolidated basis, in accordance with Article 4 and 9 of the Key Indicators for Risk-based Supervision of Commercial Banks. ### Supervisor information collection and monitoring (EC4, EC5, EC6, EC7) - CBRC regularly collects information on banks’ top 10 largest corporate borrower groups, top 10 single borrowers and top 10 interbank lending. Information on banks’ sectoral, geographical and currency exposures are also collected regularly. - The credit reporting system, ORMS, contains information on all borrowers including those to whom banks have large exposures; CBRC urges banks to check lists of connected counterparties submitted by different institutions via ORMS. - Article 3 of the Corporate Groups Guidelines defines a corporate group by criteria (i)–(iv), where (iv) covers other forms of affiliations that may lead to a transfer of assets or profits on a non-arm’s length basis. - CBRC issued Notice on Further Enhancing Credit Risk Management in September 2016 to clarify the concept of economic interdependence—economic interdependence exists if the bankruptcy of one party is likely to have a significant impact on the repayment capability of the other. - CBRC may exercise supervisory judgment in determining “groups of connected counterparties” on a case-by-case basis and may require banks to provide more supporting evidence; the final decision lies with the supervisor. - Stress testing: The Stress Test Guidelines require banks to include material concentration risks into their stress testing programs and set out a minimum list of stress scenarios (including declining macro-economic growth, large downward fluctuations of real estate prices, deterioration of lending quality, downgrading or default of concentrated credits and main counterparties, defaults in some industries). - Articles 25 and 26 of the Stress Test Guidelines require banks to use test results in setting risk appetite, adjusting risk limits, formulating risk mitigation actions and contingency plans; CBRC requires stress testing to be part of ICAAP and to inform internal CAR targets. ### Assessment and recommendations (Principle 19) - Assessment: Largely Compliant. - Comments: - CBRC has enhanced supervision of concentration risks and monitors concentration risks by industries, geographies, corporate groups, etc. - Company Law treatment: entities with common local government ownership are not considered connected parties by virtue of local government ownership alone; criterion (iv) (other affiliations) requires further clarification in application to entities with common local government ownership. - Recommendations: - further review and clarify the application of criterion (iv) in identifying relationships between entities with common local government ownership. - reduce the regulatory limit on a bank’s interbank exposures (excluding intraday interbank exposures) to 25% of its Tier 1 capital and establish a lower limit of 15% of Tier 1 capital on a G-SIB’s exposures to another G-SIB. ### Transactions with related parties (Principle 20) — definition and governance - Assessment context: prevent abuses and conflicts of interest; require arm’s length terms, monitoring, mitigation and write-off policies. - Definition (Rules on Related Party Transactions of Commercial Banks with Insiders and Shareholders): - Related natural persons include: (a) insiders (Board members, senior managers, and others entitled to decide or participate in exposure granting and asset transfer activities); (b) the bank’s major individual shareholders who hold or control over 5 percent of the bank’s shares or voting rights; (c) close family members; (d) other individual controlling shareholders, board members, and key management staff of the bank’s related legal persons or other organizations; (e) other natural persons who have significant influence on the bank. - Related legal persons or organizations include: (a) a bank’s major non-individual shareholders able to directly, indirectly, jointly hold or control over 5 percent of the bank’s shares or voting rights; (b) legal persons under common control, direct or indirect, with the bank; (c) legal persons controlled directly or indirectly, or significantly influenced by the bank’s insiders or major individual shareholders together with their close family members; (d) other legal persons that have direct or indirect controls on the bank, or are capable of significantly influencing the bank. - Article 11: apply substance over form—where parties that influence a bank do not transact at arm’s length and obtain benefits or cause losses, they shall be deemed related parties. - Article 17: CBRC has the discretion to define related natural persons, legal persons or other organizations. - Exclusions: Article 8 excludes commercial banks and state-owned asset management companies; Article 217 of the Company Law excludes entities with common local government ownership from being considered connected parties by virtue of local government ownership alone. ### Transactions with related parties — conduct, limits, reporting and supervisory practice - Arm’s length terms (EC2): Commercial Bank Law and Related Party Transaction Rules prohibit unsecured loans to related parties, require secured loans not to be on more favorable terms than third-party borrowers, prohibit acceptance of own equity as pledge for credit, and prohibit guarantees for related parties’ financing. Article 67 of the Consolidated Management and Supervision Guidelines requires intragroup transactions at arm’s length or market prices. - Approval and conflict management (EC3): Significant related party transactions require review by the related party transaction control committee and approval by the board. A significant related party transaction = single transaction > 1% of the bank’s capital, or a transaction causing total exposure to the related party to exceed 5% of the bank’s capital. Conflicted Board members must be excluded from approval process (Article 26). CBRC can order rectification and, if material or not rectified, order replacement of Board members or senior managers (Article 40). - Process independence (EC4): Article 4 of the Credit Issuance Guidelines requires exclusion of related banks’ employees when granting credit for related parties. Supervisors review reports, committee minutes and approval processes to ensure independence. - Exposure limits (EC5): Article 32 sets limits: single related party exposures shall not exceed 10% of capital; exposures to a corporate group with a related legal person shall not exceed 15% of capital. Margin deposit, pledged deposit receipt and treasury bonds provided by related parties can be excluded when calculating exposure balance. Aggregate exposures to all related parties shall not exceed 50% of the bank’s capital. Article 33 gives CBRC power to reduce these limits. - Policies, monitoring and disclosure (EC6): Article 23 requires banks to establish policies covering Board oversight, composition/responsibilities of related party transaction control committee, identification, pricing, approval authorities, collection and management of related party information, risk monitoring, absence requirements, internal audit, information disclosures. Article 36: annual Board report to general meeting on implementation and exposures. Article 38 and Article 14 of Rules on the Information Disclosure require disclosure in financial statement notes on aggregate exposures and significant related party transactions. - Supervisor information (EC7): CBRC obtains quarterly reports on significant related party transactions and a quarterly return on transactions with Top 10 largest related parties detailing shareholding structure, credit granted to largest related party group, detailed credit reviews, and aggregate exposures; on-site examinations check accuracy and completeness. ### Assessment and comments (Principle 20) - Comments: - The definition of related party is comprehensive but excludes related commercial banks and generally does not treat state government ownership as a trigger for related party reporting, limits or approvals. Thus, a commercial bank owned by the local government can lend to local government-owned entities without being treated as related party exposure by virtue of ownership alone. - Recommendation: review this issue and bring such transactions under enhanced diligence and limits applicable to related parties, potentially above a threshold. - The aggregate exposure limit to all related parties of 50% of capital is less strict than the allowable large exposure limit for a single counterparty or groups of connected counterparties. ### Country and transfer risks (Principle 21) - System exposure: - CBRC estimates country and transfer risk exposures of the banking system are 2% of total banking system assets, with the majority of exposures to United States and countries in Asia. - Large banks account for 98% of total country risk exposure of the banking system; these exposures account for about 4% of the banks’ total assets. - Guidelines and requirements: - Guidelines on Country Risk Management of Banking Institutions (2010) require integration of country and transfer risks into risk management systems, Board and senior management oversight, policies/procedures, country risk rating systems, monitoring on solo and consolidated basis, and heightened review frequency for countries with significant changes. - Articles 25–28 prescribe provisioning for country risk with minimum provisioning levels ranging from 0.5% to 50% for country risk classifications of low, relatively low, medium, relatively high and high risk. - Reporting and supervisory practice: - Article 32 requires annual reports on country risk exposures and provisioning, with more frequent or detailed reporting when needed; CBRC collects major banks’ policies and requires semi-annual submission on limits, exposures and provisions. - Stress testing: Article 20 requires banks to establish stress testing for country risks; banks must report stress test results to Board and senior management. CBRC conducts supervisory reviews and requires corrective actions where necessary. - Assessment: Compliant. - Comments: Country and transfer risk exposures have increased slightly and are expected to increase further as banks expand overseas or finance more overseas projects. Since 2010 banks have better appreciation of country risk and many include country risk in policies, limits and stress testing. ### Market risk (Principle 22) - Regulatory framework: - Market Risk Guidelines and Comprehensive Risk Management Guidelines set expectations for market risk management commensurate with business nature, size and complexity. The Market Risk Examination Manual outlines supervisory assessment and on-site examination procedures. - Governance and board oversight: - Article 8 of Market Risk Guidelines requires the Board to assume ultimate responsibility for market risk management, approve strategies/policies, set market risk tolerance, and receive regular reports on market risk. - Information systems, limits and controls (EC3): - Articles 24, 26 require sound management information systems for measurement, monitoring and reporting to Board and senior management. - Article 23 requires banks to set, review and adjust market risk limits; Derivatives Trading Rules (Article 22) imposes additional limit approval and breach handling for derivatives. - Article 20 requires model selection, review and validation processes for banks adopting internal models; back testing is required (Article 21). - Valuation and model validation (EC4, EC5): - Articles 18 and 20 require daily revaluation of trading book mark-to-market positions, independence of valuation and data, and independent model validation. - Fair Value Valuation Guidelines (Article 15) require diversified valuation models and cross-verification for illiquid or complex instruments; Annex 13 to the Capital Rules requires consideration of valuation uncertainties in capital adequacy. - CBRC may deduct unrealized earnings on changes in fair value from capital where valuation issues are not rectified (Article 27 Fair Value Valuation Guidelines). - Capital and models: - All banks required to calculate capital charge using standardized approach; internal models may be used subject to CBRC approval. Five banks have approval to use internal models. - CBRC uses supervisory returns, stress tests and meetings with banks and external auditors to assess vulnerability to unexpected losses. - Stress testing (EC6): - Market Risk Guidelines (Article 22) and Guidelines on Stress Tests of Commercial Banks require comprehensive stress testing covering market risk and use of results in contingency planning and capital/limit decisions. CBRC supervises and inspects stress testing and conducts unified supervisory stress tests. - Supervisory findings and metrics: - Assessment: Compliant. - Market risk RWA have hovered around 1 percent of total RWA since 2013. - By end-June 2016, assets on trading books of 5 large banks and 12 national joint-stock banks accounted for 0.86 percent of total assets on average; the bank with the largest trading book assets accounted for 3.42 percent. - As of end-June 2016, 58 commercial banks had conducted derivatives transactions; 29 of them trade only interest rate and exchange rate derivatives. Interest rate and exchange rate derivatives nominal principals accounted for almost 99 percent of the total. - One foreign bank had approximately 8 percent of RWA in market risk. - Supervisory capacity and recommendations: - Since 2011 CBRC built a team of over 30 experts on market risk supervision. - Large banks examined on-site every two years (including overseas institutions); some medium-sized banks every two to three years; foreign-funded banks every three to four years with a focus on market risk and derivatives. - Recommendation: increased on-site oversight of foreign banks in market risk; maintain vigilance and continue building market risk capacity. ### Interest rate risk in the banking book (IRRBB) (Principle 23) - Regulatory requirements: - Interest Rate Risk Guidelines require banks to establish IRRBB management framework consistent with their strategies, size and complexity (Article 8), integrate IRRBB into comprehensive risk management (Article 9), and set specific governance, measurement, monitoring and IT requirements (Articles 10–13, Chapter 3). - Article 18 requires IRRBB measurement to include re-pricing risk, basis risk, yield curve risk and option risk, and interest rate risk in major currencies, covering on- and off-balance-sheet items. - Measurement techniques include gap analysis, duration analysis, sensitivity analysis, scenario simulation and stress testing. - Governance and board oversight: - Boards must assume overall responsibility, approve strategies/policies/limits, ensure senior management implements policies, and ensure internal audit coverage (Interest Rate Risk Guidelines Article 10; Market Risk Guidelines Article 8). - CBRC conducts OSS and on-site examinations to assess Board and senior management implementation and may require corrective actions. - Models, validation, limits and MIS: - Article 29 requires model validation procedures and performance tracking; Article 28 requires documentation to support independent validation. - Article 23 requires limit management, internal approval and procedures for limit exceptions and breaches; limits to be commensurate with nature, scale and complexity and approved by the Board. - Article 12 requires MIS support for calculating re-pricing gap, analyzing IRRBB in major currencies, assessing impact on net interest income and economic value, supporting limit compliance checks, and supporting stress testing and model validation. - Supervisory practice: - CBRC evaluates IRRBB measurement adequacy, assumption soundness, limit management effectiveness and MIS completeness through off-site surveillance and on-site examinations. *People’s Republic of China — Extracts from the IMF country supervisory assessment documents contained in the provided content unit.* ### Annex 13 Risk Assessment Criteria for Commercial Banks to the Capital Rules further sets ### Annex 13 Risk Assessment Criteria for Commercial Banks to the Capital Rules further sets out IRRBB, liquidity and operational risk supervisory requirements ### IRRBB measurement, assessment, mitigation and MIS (Annex 13; CBRC practices) - CBRC combines on- and off-site techniques (OSS and on-site inspections) to analyze, monitor, assess banks’ IRRBB practices and issue risk warnings. - On- and off-site assessment focuses on: - whether banks’ IRRBB measurement systems fully cover major positions and potential risks, match banks’ business nature and complexity, and produce clear and reasonable measurements; - whether risk measurement procedures fully consider risks that may impact banks’ revenue and capital; - whether banks understand limitations of risk measurement tools and have an independent and effective audit function to validate model reliability and validity; - whether banks follow appropriate principles in setting risk limits, conduct regular risk assessment, and adequately communicate limits management policies to related persons; - compliance with limits, existence of written and documented policies and procedures, appropriate exception monitoring/handling techniques, and appropriate exception approval procedures; - whether banks’ management information systems can effectively provide timely, accurate and complete information. - On-site inspection powers include access to MIS to collect returns/data and review all IRRBB materials, such as: - policies, procedures and decisions to measure, monitor, evaluate, verify and manage IRRBB; - design and analysis of interest rate shock scenarios and model design and validation information; - limit management policies and procedures, reports on implementation of limit policies, approval documents for exceptions to limits, and reports on handling of unapproved exceptions; - risk mitigation measures. - CBRC tests Board, senior management and risk management departments’ understanding through interviews. - CBRC specialist team and routine data analysis identify outliers; pilot of more extreme scenarios (e.g. 250 and 300 basis point shifts as well as twists) in Shanghai, taking revised Basel standards into account (to be implemented by 2018). - Banks required to undertake their own scenario analysis; interest rate sensitivity is incorporated in stress testing. - CBRC encouraged to issue more extensive guidance using adoption of revised Basel standard as a springboard. *Italicized final line provided by pipeline.* ### Stress testing requirements for IRRBB and market-risk-related scenarios (EC4) - Supervisory expectations (Interest Rate Risk Guidelines and Guidelines on Stress Tests of Commercial Banks): - Article 24: banks shall conduct stress tests and develop contingency plans based on existing/predicted business performance, strategy, total assets and liabilities and interest rate risk characteristics; stress tests shall cover all material sources of risks and senior management shall consider stress test results when developing/reviewing IR risk management policies/procedures/limits. - Article 33: CBRC shall review and assess banks’ IRRBB management system, including effectiveness of stress tests and application of measurement and stress test results. - Article 17 (Guidelines on Stress Tests): commercial banks shall conduct comprehensive stress tests covering all types of risks and major on- and off-balance sheet businesses, consider correlations and possible non-linear relationships between risk factors and stress-bearing indicators; integrate stress tests for various risk types to reflect overall risk profile. - Article 30: risk types covered by stress scenarios shall include IRRBB. - Article 32: market risk stress scenarios shall include interest rate re-pricing, benchmark interest rate asynchronization, drastic fluctuations in yield curve and loss from exercising options, etc. - CBRC requires banks to report net interest income and net value with the impact of 200 basis points parallel movement of interest rate in the Table on Interest Rate Re-pricing Risks, and report interest rate shock scenarios in region-specific supervisory returns. - CBRC assesses whether banks’ stress test programs and selected scenarios reflect market conditions and banks’ positions/risk features, and reviews contingency plans and adjustments to limits management and asset allocation based on stress test results. - CBRC organizes system-wide unified stress tests, including full-scope and targeted stress tests that consider changes in profit/loss caused by interest rate risk exposures under stress scenarios. - Assessment of Principle 23: Compliant. - Comment: phased liberalization of interest rates has allowed banks to adapt; CBRC reports banks’ behavior has been broadly conservative. CBRC has enhanced resource specialization. CBRC pilots more extreme scenarios in Shanghai. CBRC should issue broader industry guidance. ### Liquidity risk supervision (Principle 24) — overarching assessment: Compliant - Principle summary: supervisor sets prudent and appropriate liquidity requirements, ensures banks have strategies enabling prudent liquidity risk management, policies and processes consistent with risk appetite, and for internationally active banks, requirements no lower than applicable Basel standards. #### EC1 — legal/regulatory framework, quantitative and qualitative requirements - Legal/regulatory scope: - Banking Supervision Law (Article 21) prescribes banks shall strictly observe prudential rules including liquidity management. - Liquidity Risk Rules applies to commercial banks established in China, including domestic and foreign-funded banks and (Article 59) rural cooperative banks, village banks, rural credit cooperatives, branches of foreign banks. - Quantitative supervisory requirements include the liquidity coverage ratio (LCR) and liquidity ratio. - LCR does not apply to institutions below the threshold of CNY200bn assets. - Liquidity ratio applies to all commercial banks; ratio of liquid assets over liquid liabilities shall be no less than 25 percent. - Qualitative requirements: - Article 4: banks shall establish/update liquidity risk management programs covering entity and group, affiliates, branches/subsidiaries and business lines. - Chapter 2 sets specific requirements on liquidity governance, strategies, policies, procedures, and MIS aligned with Basel Principles. - Article 56: CBRC powers to require corrections within a specified period and adopt a range of supervisory measures (interviews, more frequent reporting, enhanced on-site inspections, restrict expansion, increased capital requirements) if banks fail to correct liquidity deficiencies. - Quantitative details: - LCR transition consistent with Basel timetable (Article 37, Article 64, Annex 2 specifies LCR in detail). - Liquidity ratio: 25 percent minimum; ratio measured over a one month horizon at contractual maturity; assets must be unencumbered and unimpaired; details in G22 liquidity return and instructions. - Supervisory discretion (Article 55) allows judgment if breach occurred during stress or other circumstances warrant. - Liquidity risk monitoring Articles 40–47 cover maturity mismatch, diversification/stability of funding, unencumbered assets, liquidity risk profile of significant currencies, market liquidity, loan-to-deposit ratio, and CBRC's use of internal bank indicators. #### EC2 — requirements reflect banks’ liquidity risk profiles and market conditions - Liquidity Risk Rules require: - annual revision of liquidity risk appetite, strategies, policies and procedures (Article 20); - stress testing programs (Article 28) considering bank-wide and market-wide systemic impact and correlations with other risks; - banks shall be able to satisfy liquidity needs and survive at least 30 days under market-wide systemic shock scenarios; - Article 30 requires adequate HQLAs to satisfy liquidity needs under stress. - CBRC monitors macroeconomic/market developments and provides quarterly industry briefings (most recent briefing was in January 2017). - On- and off-balance sheet risks must be covered (Articles 17, 22, 23, Annex 1); CBRC obtains data through OSSRS to monitor maturity gaps and off-balance sheet flows. #### EC3 — robust bank-level liquidity management framework - Article 6: liquidity risk management system commensurate with business size, characteristics and complexity; system components: governance, strategies/policies/procedures, identification/measurement/monitoring/control, MIS. - Board oversight (Article 8): Board shall review and approve liquidity risk appetite, strategies, important policies and procedures; Article 30 requires all banks to hold adequate HQLAs in stress. - Banks’ policies/procedures must cover on- and off-balance sheet activities and all business lines, branches, subsidiaries and affiliates (domestic and overseas) (Article 16, 17). - LCR supervisory threshold: banks with total assets no less than RMB 200 billion must have policies/procedures to calculate and manage LCR and supporting information systems. - CBRC evaluates liquidity management via on-site examinations and OSS, covering framework, appetite, strategies, policies, MIS and reporting. - Historical note: liquidity stress in 2013 focused bank attention. #### EC4 — liquidity risk environment, day-to-day and MIS requirements - Risk appetite: Board review and approval (Article 8); commensurate with operational strategies, business characteristics, financial strength, funding capability, overall risk appetite and market influence (Article 16). - Day-to-day and intraday management: - Article 10: designate a department to manage liquidity risk, HQLAs monitoring, limit compliance, stress testing, contingency plans; - Article 27: strengthen intra-day liquidity management and ensure adequate intraday positions and funding arrangements under normal and stress. - Effective IT systems (Article 34) shall have at least 7 functions: - (a) calculate cash inflows, outflows and gaps during set time horizons on a daily basis, - (b) calculate regulatory and monitoring indicators timely and increase monitoring frequency where necessary, - (c) support monitoring and control of liquidity risk limits, - (d) support real-time monitoring of large-amount funding flows, - (e) support monitoring of types, quantities, currencies, locations, entities, and escrow accounts of HQLAs and other unencumbered assets, - (f) support monitoring of types, quantities, currencies, locations, entities, and escrow accounts of collateral, - (g) support stress testing under different hypothetical scenarios. - Board oversight and internal audit: - Article 8: Board assumes ultimate responsibility; Article 9: senior management establishes and assesses liquidity appetite and strategies; Articles 14–15: internal audit to regularly audit adequacy and effectiveness and report to Board. - CBRC collects liquidity indicators and reviews Board performance through returns and on-site observation of Board meetings. #### EC5 — funding strategies, HQLA cushion, diversification and market access - Funding requirements: - Articles 17, 18, 20: banks must have written liquidity/funding policies, assessed at least annually; Article 33: banks shall prudently assess the impact of credit, market, operational, reputation and other risks on liquidity. - HQLA cushion: - Article 30: banks must hold adequate HQLAs; LCR purpose is to ensure banks have adequate eligible HQLAs to satisfy liquidity needs for at least 30 days under prescribed stress scenarios (Article 37 and Annex 2); eligible HQLAs defined as cash/equivalents and assets meeting criteria for quick liquidation with no/negligible loss. - Diversification: - Article 25: banks shall establish/update funding strategies to increase diversification and stability; analyze funding demands/sources across horizons, manage concentration by liability types, maturity, counterparties, currencies, collateral and funding markets, and set concentration limits. - Relationships and asset marketability: - Article 25 (3): strengthen management of funding channels and maintain relationships with major funding counterparties; - Article 25 (3–4): assess ability to obtain funding and marketability of assets; monitor trading volumes/prices and market liquidity impact. - CBRC monitoring: - monitors diversification/stability via OSS returns (excess reserve ratio, core funding ratio, interbank funding ratio, top 10 depositors ratio, top ten interbank funding ratio) and LCR returns for HQLA composition; issues risk alerts for banks with higher funding risks. #### EC6 — contingency funding plans - Article 29: contingency plans must be commensurate with size, characteristics, complexity, risk profiles, organizational structure and market influence; plans must be tested/assessed at least annually. - Plan requirements include: - set a range of scenarios as triggers; - specify contingency funding sources and reasonably estimate possible size and duration, considering cross-border/cross-institutional liquidity transfer restrictions; - contain contingency procedures/actions covering asset, liability, internal/external communication and actions to reduce adverse impact from information asymmetry; - articulate authorities and responsibilities for Board, senior management and relevant departments; - contain separate contingency plans on entity and group levels and specific plans for significant currencies and major overseas geographic areas where necessary; specific plans required for branches/subsidiaries/affiliates subject to liquidity transfer restrictions. - Annex 1 Explanatory Notes provides 7 scenarios as triggers and detailed contingent actions and reporting/communication requirements, including communication with government agencies and supervisory authorities. - CBRC assesses contingency plans via OSS and on-site examinations and focuses on comprehensiveness of scenarios, reliability/adequacy of contingency funding sources, feasibility of actions, clarity of responsibilities, and smoothness of reporting/communication. - Banks generally have established and updated contingency plans; CBRC requires submission of liquidity policies, processes and contingency plans and may require corrective actions or supervisory measures. #### EC7 — liquidity stress testing programs and scenarios - Article 28: banks must have liquidity stress test programs for short-term and protracted stress with requirements: - (a) reasonably and prudently designed and periodically reviewed scenarios, considering bank-wide and market-wide impact and levels of stress (mild/medium/severe); - (b) minimum time horizon no less than 30 days under market-wide systemic shock scenarios; - (c) take into account correlations between liquidity risk and other risks and market liquidity impact; - (d) conduct periodic stress tests at entity and group levels, and separate tests when liquidity transfer restrictions apply; - (e) frequency at least quarterly and commensurate with size, risk profile and market influence; frequency increases during severe market fluctuations; - (f) carry out ex-post tests where possible and record results/ex-post verifications in writing; - (g) use test results in setting liquidity appetite, strategies, policies, plans and adjust as necessary. - Article 29: banks shall consider stress test results when implementing contingency plans. - Article 14: internal audit to regularly review reasonableness of stress-test assumptions. - Indicative scenarios in Annex 1 include: significant decrease in liquidity of traded assets; major outflow of wholesale and retail deposits; declining availability of wholesale/retail funding; default/bankruptcy of a major counterparty; credit rating downgrade/increase in reputational risk; material adverse change in market liquidity; damage from off-balance sheet business, complex and illiquid products; disruption to payment/clearing systems. - CBRC assesses reasonableness/prudence of stress scenarios and whether results are used; CBRC noted banks perform stress testing frequently (quarterly) though CBRC typically receives results annually. #### EC8 — foreign-currency liquidity transformation and significant currencies - Article 62: a currency is “significant” if aggregate liabilities denominated in that currency amount to 5 percent or more of the bank’s total liabilities. - Article 22: banks shall separately estimate/analyze cash flows by significant currency. - Article 29: banks shall develop specific contingency plans for each significant currency as needed. - Article 32: identify, measure, monitor and control liquidity risk for domestic and foreign currencies in aggregate and for each significant currency individually. - Article 25–26: strengthen management of concentrations in currency-denominated liabilities and set concentration limits; monitor denominations of unencumbered assets available as collateral. - Liquidity transfer restrictions defined in Article 60; stress tests, contingency plans, consolidated management and LCR calculation shall consider transfer restrictions (Articles 28, 29, 31, 39). - Guidelines on Consolidated Management and Supervision (Article 42) requires assessment of cross-jurisdiction/ entity/currency liquidity transformation capacity and attention to capital movement restrictions and ring-fencing effects. - CBRC supervisory responsibilities: - Article 40 requires regular analysis of liquidity risk in significant currencies; - Article 44 allows CBRC to decide whether to monitor liquidity risk in each significant currency individually; - Article 42 requires analysis of concentrations of on- and off-balance sheet liabilities by instrument, counterparty and currency. - CBRC uses liability-denominated-in-foreign-currency data and secondary indicators (deposit/loan gaps in foreign currencies, interbank asset/liability gaps in foreign currencies, sum of gaps plus paid-in foreign currency capital) to identify active foreign-currency liquidity transformers. - CBRC requires banks to provide LCR data in each single currency if aggregate liabilities in that currency amount to 3 percent or more of bank’s total liabilities. - Current system: majority of banks have small foreign-currency transactions; only a few large banks have significant currencies (predominantly U.S. dollar). Foreign currencies held are freely convertible and actively traded (U.S. dollar, Hong Kong dollar, Euro, Japanese Yen, British pound). - Large banks include foreign-currency liquidity requirements in management programs, monitor mismatches and undertake regular foreign-currency liquidity stress tests. - Assessment comments: - CBRC’s liquidity risk supervision is more sophisticated and intense than at last assessment; specialist resources developed. - All banks with assets no less than RMB200bn are subject to LCR, representing about 90 percent of banking system assets. - All banks must meet liquidity ratio and management standards based on Basel standard. - CBRC should focus supervisory attention on lower tier banks increasingly dependent on wholesale funding (not all subject to LCR), ensure stringent/severe stress test scenarios and contingency plans, and consider wholesale funding reliance and WMP contagion risks. - CBRC provided wide range of supervisory materials; supervisory work rated very high. - Note: BCP assessment mission preceded Basel Committee RCAP assessment for LCR regulations planned for June 2017. ### Operational risk supervision (Principle 25) — framework and supervisory practice - Principle summary: supervisor determines banks have adequate operational risk management framework consistent with risk appetite, risk profile and market/macro conditions, covering identification, assessment, evaluation, monitoring, reporting and control/mitigation. #### EC1 — legal/regulatory requirements and supervisory focus - Operational Risk Guidelines apply to all banks and require operational risk frameworks/policies proportionate to business model, size, complexity and risk profile (Articles 5 and 6(4)). - Banks required to monitor and report operational risk profile and material losses regularly (Article 15) and maintain early-warning systems. - Capital perspective: - Capital Rules Articles 105 and 106: banks shall have sound risk management framework and ICAAP commensurate with risk appetite, management capacity, operation performance, risk trends and long-term strategies. - Heightened Regulatory Standards (HRS - Article 14) for five large banks impose higher target standards for operational risk incidents and losses. - Supervisory focus areas: Board oversight, senior management responsibilities, organizational structure, policies/processes/approaches, and adequate capital coverage. - CBRC assesses operational risk management tools: RCSA, KRIs, LDC; integrates loss data metrics into OSSRS for standardized-approach banks. - Supervisory methods include OSS, on-site examinations and market access reviews; three examination types: - full-scope on-site examinations at least once every 5 years (Article 7), adjusted by risk profile/systemic importance; - thematic examinations on common industry risks and individual bank profiles; - full-scope assessment and ongoing monitoring for standardized approach banks. - CBRC monitors fraudulent loss events, issues supervisory letters and requires timely progress reports; severe loss events trigger individual accountability up to two management levels higher and penalties for internal auditors. #### EC2 — Board approval and oversight of operational risk strategies/policies - Article 6: Board shall consider operational risk a major risk and assume ultimate responsibility; Article 6(1) articulates Board’s role in establishing operational risk strategies/policies. - Regular review by Board not explicitly specified but expected via Comprehensive Risk Management Guidelines and other corporate governance requirements. - Risk appetite addressed in Capital Rules (Article 111) and 2016 Comprehensive Risk Management Guidelines; Board to decide risk appetite commensurate with strategy and environment and ensure adequate capital. - CBRC assesses Board role through on-site examinations, OSS and regular meetings. #### EC3 — implementation by senior management and integration into bank processes - Operational Risk Guidelines Articles 6(2-4), 7 and Article 8 require senior management responsibility and designation of independent department for operational risk management. - Capital Rules Article 113: senior management responsible for establishing/organizing ICAAP and ensuring consistency of comprehensive risk management and capital allocation. - CBRC assesses senior management performance by verifying policy implementation, understanding of risk profile, allocation of resources, clear departmental responsibilities and timely policy updates. - Progress observed: increased senior management involvement, large banks with weekly reporting mechanisms, quarterly analysis of operational risk profile/trends, issuance of risk alerts. #### EC4 — disaster recovery and business continuity - Operational Risk Guidelines Article 19: banks shall formulate contingency and business continuity plans commensurate with size/complexity and regularly test disaster recovery and continuity plans. - Guidelines on Business Continuity Supervision of Commercial Banks (Article 2) require emergency response and recovery frameworks covering strategies, organizational structure, approaches, standards and procedures; Article 32 requires business continuity plans for all critical activities consistent with recovery objectives. - Management Standards on Emergency Response of Banks' Important IT Systems (Provisional) Article 4 requires risk assessment and contingency plans for critical information systems. - Notice on Strengthening the Safety of Significant Information Systems highlights prevention of system disruption risks and key nodes/time points. - Article 25: CBRC to regularly examine and assess quality/comprehensiveness of disaster recovery and business continuity plans; banks must submit annual business continuity reports, assessment and audit reports in the first quarter of each year. - CBRC conducts on-site examinations and specific continuity examinations (since 2014) on large and joint-stock banks covering all components of business continuity. - Observations: large banks organize approximately 1,000 drills every year; movement to ‘two-site, three-center’ disaster recovery infrastructure with local operational back-up centers and data back-up centers in alternative cities; substantial progress in business continuity management. #### EC5 — IT policies, processes and infrastructure - Information Technology Risk Management Guidelines require IT risk management framework covering governance, internal control and risk controls across system development, testing, operation and maintenance. - Banks must have: - IT strategies, operation plans and IT risk assessment plans commensurate with business plans and allocate sufficient resources (Article 14); - comprehensive IT risk management strategies covering information classification/protection, system development/testing/maintenance, operation/maintenance, access authorization, physical security, personnel safety, business continuity and contingency plans (Article 15). - IT department responsibilities (Articles 20, 21): information classification/protection and information security management. - Dynamic Monitoring Indicators for IT Risk specifies 8 indicators across stability (system availability, transaction success rate, success rate of system updates), security (phishing website blocking rate, external attack case change rate, number of information security events) and size (electronic-channel transactions change rate, main electronic active users/accounts change rate). - CBRC On-site Examination Manual on IT Risk Management details 300 key risk factors covering information security and system development and provides methods/procedures for supervisors. - CBRC strengthened IT risk supervision: CBRC IT risk supervision team, increased experts, on-site examinations covering policy banks, large banks, joint-stock banks, rural financial institutions, city commercial banks and locally-incorporated foreign banks (38 on-site programs involving 36 institutions since 2011). - CBRC established On-site Examination Bureau in 2015 and expanded coverage in 2016 to interactions between business, decision making and IT risks. #### EC6 — information systems for operational risk monitoring and reporting - Operational Risk Guidelines Article 18: banks shall establish/update operational risk management systems to record/store data related to operational risk losses and events to support RCSA, KRIs and LDC and reporting. - CBRC supervisory focus: whether systems support storage/access to operational risk information, operation of RCSA/KRIs/LDC, and support operational risk management function, senior management and Board. - See EC7 for reporting to supervisor. #### EC7 — reporting mechanisms to supervisor - Articles 15–16: banks required to set procedures to report operational risk profile and loss events internally; significant loss events must be reported timely to Board, senior management and relevant managers. - Articles 23–24: banks shall submit operational risk reports to CBRC and report significant operational risk events to CBRC. - Significant Emergency Reporting Procedures prescribe standards, channel and format for reporting significant operational risk events to CBRC. - Standard reporting: banks submit case information, IT risk event information and internal loss data classified by business line and event types; IT indicators collected since 2015. CBRC collects/analyzes operational risk information via OSSRS. - CBRC reviews banks’ reporting frameworks by monitoring submitted reports and assessing compliance of reporting frequency/lines with Board-approved policies and the use of KRIs and loss data to trigger corrective actions. - CBRC encourages loss data collection even though internal models are not permitted for capital adequacy; internal loss estimates assist internal capital allocation and risk sensitivity. #### EC8 — outsourcing risk management - Outsourcing in China mainly covers supporting functions (IT systems, customer service, document maintenance); banks may not outsource strategic management, core businesses and internal audit functions or key procedures (Guidelines on Outsourcing Risk Management – Articles 7 and 17(4)). - Guidelines apply to all banking sector financial institutions. - Due diligence requirements set out in Article 13; structuring of arrangements in Articles 14–16; control environment detailed in subsequent provisions. *Italicized final line provided by pipeline.* ### Section III, Risk Management and contingency planning is addressed in Article 14(3) and ### cr17403 - Section III, Risk Management and contingency planning is addressed in Article 14(3) and ### Legal and regulatory framework for outsourcing, IT risk and contingency planning - Article 5 of the Guidelines on the Outsourcing Risk Management of Banking Financial Institutions: banks shall have a framework, including policies and procedures for the management of outsourcing risks and incorporate such framework and policies into the comprehensive risk management system. - Operational Risk Guidelines (Article 20): banks shall establish risk management policies to ensure the safety, soundness and legitimacy of outsourcing activities; policies should address contract or service agreements and clarify responsibilities between outsourcing providers and the bank. - Information Technology Risk Management Guidelines (Chapter 8) — IT outsourcing specific requirements: - IT outsourcing contract shall be approved by IT risk management department, legal department and IT Management Committee. - Processes to regularly review and revise the service agreement and maintain appropriate oversight over outsourced activities. - Banks shall retain IT management responsibilities and oversee performance of outsourcing providers with due diligence. - Banks shall remain prudent when outsourcing important activities (such as data center and IT infrastructures). - Prior to outsourcing, a written report shall be submitted to the CBRC. - Banks are expected to be sufficiently prepared prior to signing outsourcing contracts or making material changes. - Confidentiality of sensitive data (customer personal information) must be maintained. - Banks must establish a contingency plan to minimize losses associated with emergency situations such as outsourcing providers’ financial deterioration, key staff run-off or unexpected termination of the contract. - A bank should file an official report to the CBRC about significant outsourcing activities such as IT infrastructure and database. - IT risk management function should not be outsourced (explicit). ### CBRC supervisory focus and assessment of outsourcing management - When examining outsourcing management process, CBRC assesses whether banks have: - established the outsourcing scope and contents; - evaluated outsourcing risk; - set up comprehensive policies; and - developed risk prevention measures. - CBRC does not have the right to assess the outsourcing provider directly and therefore guides banks on how to assess vendor risk. - CBRC focuses on banks’ outsourcing management policies, organizational structure, performance of the Board and senior management, and comprehensiveness/effectiveness of outsourcing risk management. - Specific CBRC assessment checklist items include: - (a) whether contents and scope are clearly defined in outsourcing policies and procedures; - (b) whether procedures for outsourcing activities have been reviewed and approved by the legal department and the department in charge; - (c) whether there are written requirements on qualifications of potential outsourcing service providers; - (d) whether responsibilities and obligations in outsourcing agreements are clearly defined with regard to security, confidentiality, and intellectual property rights; - (e) whether service level agreements include indicators of performance evaluation as well as corrective measures; - (f) whether security and confidentiality measures in outsourcing agreements can protect customers’ sensitive data; - (g) whether documentation is properly managed. - On outsourcing assessment and supervision, CBRC checks: - (a) whether banks conduct due diligence on potential outsourcing providers, establishing an evaluation mechanism to review business conditions, financial strength, credit history, security qualifications, service capacity, actual risk control capacity and accountabilities; - (b) whether banks have proper oversight over the outsourced activities with regular evaluation on the service and contingency plans of the outsourcing provider. - Annual supervisory practice: CBRC prepares Summary Report on Outsourcing Risk and distributes it to local offices and banks. - Since 2011, CBRC has examined outsourced activities across banks including large banks, joint-stock banks, city commercial banks and foreign-funded banks. - CBRC monitors banks’ use of outsourcing services to identify vendors with concentrated exposures in the sector. ### Industry coordination and information-sharing platform - In 2013, the banking IT outsourcing supervision platform was established, comprising supervisory authorities and banking institutions. - Platform provides a channel for over 100 banks to share information concerning IT outsourcing risk management. - Designed to help banks check stability of vendors of outsourced services; CBRC flags major risk areas and asks banks to carry out targeted inspections. - Larger banks participate and share expertise with smaller institutions. ### Operational risk and broader supervisory assessments (selected findings) - Operational risk is assuming a greater proportion of the banking system’s aggregate risk weighted assets at just over 7 percent. - Variation in sophistication across banks: - Most sophisticated banks use internal approaches for operational risk. - Less complex, typically local and regional banks are more focused on internal controls and in some cases rely on the basic indicator approach rather than developing internal operational risk models. - Recommendation: scope to encourage development of operational risk standards within banks, possibly via implementation of expected revised Basel standard on operational risk. ### Internal control, audit, and supervisory requirements (high-level summaries and exact numeric requirements) - Internal Audit staffing minimum: - Article 14 of the Internal Audit Guidelines prescribes that the number of internal auditors of a bank shall account for at least 1% of the total headcount. - External audit rotation: - Article 29 of the Administrative Rules on Accounting Firm Selection by Financial Institutions require banks rotate their external audit firm after five years, except that for an accounting firm that ranks within top 15 by Chinese Institute of Certified Public Accountants, the tenure can be extended to eight years. - Article 30 requires the Certified Public Accountant responsible for signing off audit reports must be rotated after five years. - Public disclosure timing: - Article 25 of the Information Disclosure Rules of Commercial Banks require banks to publish audited financial statements within four months after the end of each fiscal year. - Article 25 also requires banks submit annual reports to CBRC at least 5 days prior to public disclosure. - Listed banks coverage: - Public listed banks in China account for about 80% of total banking system assets. - According to CBRC’s estimates, listed banks account for about 76% of total banking system assets have appointed international accounting firms as their external auditors (audit in accordance with ISA). - Supervisory meetings and coordination with external auditors: - CBRC holds bilateral or tripartite meetings with banks and external auditors at least annually; more frequently for systemically important banks. ### Disclosure, reporting and enforcement (selected numeric enforcement and reporting data) - CBRC enforcement for information disclosure breaches: - Article 46(4) of the Banking Supervision Law: where a bank fails to comply with applicable rules on information disclosure, CBRC shall order corrective actions and impose a fine ranging from RMB 200,000 to RMB 500,000. If material or uncorrected, CBRC can suspend business for rectification or revoke banking license. - AML/CFT supervisory and enforcement activity (selected figures and outcomes): - From 2011 to 2015, the PBC carried out over 4,000 on-site examinations on banking financial institutions and imposed over 500 administrative penalties as required by law. - From 2012 to 2015, financial institutions submitted 20,237 reports on transactions suspected of money laundering, terrorism or other criminal activities (of which over 98 percent are from banks). - After analysis and investigations, the PBC reported 3,370 leads to competent investigation authorities, assisted with the investigation of 4,071 cases, and helped solve 1,025 cases. - From 2014 to 2015, banks submitted 615 reports on transactions suspected to be terrorism-related to the PBC. - After analysis and investigation, the PBC reported 245 clues to competent investigation authorities, assisted with the investigation of 596 case clues, and helped solve a number of major terrorism-related cases. - CAMLMAC reporting volume: - In 2015, CAMLMAC received 11.19 million reports on suspicious transactions, 51 percent of which were related to the banking sector. - PBC sanctions statistics: - From 2012 to 2015, PBC local offices imposed administrative penalties in over 500 examinations. - From 2014–2015 PBC supervised enforcement: in 2015, the PBC imposed administrative penalties on 119 banking financial institutions, among which 68 failed to establish AML internal control policies and procedures as required, 7 failed to set up a dedicated AML function or appoint an internal department to take charge of AML work as required, and 23 failed to provide AML training for staff as required. - AML Law pecuniary sanctions: - Maximum pecuniary sanction that can be applied for a single breach of the preventive measure regime is RMB 5,000,000. - The average value of sanctions applied during the period 2013 to 2015 was RMB 164,135. - The highest fine ever imposed by the PBC was RMB 3,000,000. - Supervisory exchange and international cooperation: - By end-2015, CALMAC had signed MOUs on AML/CFT information exchange and cooperation with 35 overseas counterparts. - In 2015, the center received 565 international AML letters and sent out 353 letters. ### Observations, supervisory gaps and recommendations (as reflected in the source) - Outsourcing and IT risk: - CBRC lacks direct authority to inspect vendors directly; it guides banks on vendor assessment and established the IT outsourcing supervision platform to share vendor-stability information. - IT risk management function is explicitly required not to be outsourced. - Banks must establish contingency plans for vendor distress, key staff run-off or contract termination and submit reports to CBRC for significant outsourcing activities such as IT infrastructure and database. - Operational risk development: - Less complex banks expanding business need to develop operational risk approaches commensurate with growth; many still use basic indicator approach. - Implementation of revised Basel standard on operational risk could encourage improved standards beyond internal controls and stable IT functions. - External audit powers: - CBRC does not have direct legal power to reject or rescind appointment of an external auditor; in practice it uses guidance and supervisory letters and can require banks to replace auditors, but lack of direct power is noted as non-compliant with essential criterion and a recommendation is made that CBRC be given direct power to reject or rescind appointment of external auditors with inadequate expertise or independence. - Disclosure and transparency: - Accounting and auditing standards are substantially aligned with international standards; disclosure by listed banks is comprehensive but there is scope to increase aggregate statistics and risk indicators disclosure for the overall banking industry (e.g., more detailed breakdowns of balance sheet structure, liquidity profile, deposit composition, breakdown of loans, concentrations). - AML/CFT: - Strong interagency coordination established via AML Joint Ministerial Committee and cooperation mechanisms, but some gaps remain: - Domestic PEPs are not formally encompassed in PEP requirements (foreign PEPs are covered); banks often apply consistent standards but a formal requirement to include domestic PEPs is recommended. - Requirements should be enhanced regarding banks’ obligation to identify beneficiaries of transactions and to ensure evidence is available for supervisory review at any time. - Maximum fines under AML Law are modest relative to bank scale; recommend recalibration of severity of fines and stronger linkage between multiple/repeat offences and additional CBRC measures. - Joint on-site examinations between CBRC and PBC AML Bureau were initiated to improve supervisory coordination and information sharing. *Source: cr17403 - Section III, Risk Management and contingency planning is addressed in Article 14(3) and* ### 1. Responsibilities, objectives and ### 1. Responsibilities, objectives and ### Responsibilities, objectives and powers - Legal framework clearly establishes CBRC responsibilities and grants powers to authorize banks, regulate, conduct ongoing supervision and undertake corrective actions to address safety and soundness concerns. - Powers to access parent companies and affiliates are not explicitly stated in the legal framework, but CBRC in practice has powers to require information on significant shareholders as it deems necessary. - Primary legal objective: promote the safety and soundness of banks and the banking system. - Subsidiary legal objectives: “towards the objectives” of stability and soundness, protect fair competition in the banking industry and promote the competitiveness of the banking industry. - CBRC strategy and objectives include market and economy development considerations, support toward internationalization of Chinese enterprises and preferential treatment to SMEs. - Assessors found no concrete evidence that CBRC has jeopardized its primary mandate of safety and soundness in pursuit of those objectives, but note references in the Commercial Banks Law to developmental considerations could create pressure, in time of stress, to prioritize developmental considerations over safety and soundness. ### Independence, accountability, resourcing and legal protection for supervisors - CBRC has a legal basis for independence but not in operational terms, creating potential failure to execute its legal mandate and ensure soundness and stability are the primary motivations. - Contributing factors: - CBRC decisions can be overturned by the State Council. - No requirement to disclose publicly the reasons for dismissal of the Chair of the CBRC. - CBRC lacks autonomy over staffing numbers and organizational design. - Financial sector complexity and interconnectedness, including four Global Systemically Important Banks (GSIBs), create significant risk that static staffing levels will impair supervisory oversight and allow system-wide vulnerabilities to emerge. - Staff complement has been static for a decade; key staff are increasingly attractive to industry opportunities. - Recommendation: increased resources, in salary scale and staffing for more specialist fields, is an urgent need. ### Cooperation and collaboration - Legal, regulatory provisions and current arrangements provide a sound framework for cooperation and collaboration with relevant domestic authorities and foreign supervisors, protecting confidential information. - Cooperation and collaboration arrangements are in place and appear to function as envisioned by the authorities. ### Permissible activities - Permissible activities for banks operating in China are clearly defined. - Use of the word “bank” in names is controlled, with stringent punishment for unauthorized use of the word bank or deposit taking. ### Licensing criteria - CBRC has powers to set criteria and reject licensing applications. - Licensing assessments encompass ownership structure, fitness and propriety of Board members and senior management, feasibility study, financial projections, internal controls, risk management. - Prior consent or non-objection from the home supervisor is required for foreign banks. - Licensing framework primarily used for conversion of rural cooperatives into rural banks and establishment of foreign bank operations. - Since 2014, fully private Chinese banks have been allowed into the system, increasing complexity of ownership and governance analysis. ### Transfer of significant ownership - CBRC has power to review and reject proposals to transfer significant ownership above 5 percent held directly in existing banks. - Legal framework does not require authorization for changes of de facto control (controlling interests held indirectly) or circumstances where holdings below five percent entail significant influence. - CBRC collects information on significant holdings through various means, but there is no systematic process for regularly receiving/collecting information on names and holdings of all significant shareholders or those exerting controlling influence. - Legal framework, regulations and procedures do not require Chinese or Rural banks to notify CBRC as soon as they become aware of any material information which may negatively affect the suitability of a major shareholder. ### Major acquisitions - Investments and acquisitions by banks are tightly controlled; CBRC requires approval of all acquisitions and investments. - Banks are not allowed to invest in or acquire broker dealers, trusts, non-bank financial institutions or commercial enterprises unless prescribed by the State Council. - Pilots for investments in asset management, insurance, leasing and finance companies exist and are subject to specific approval. - With increasing sophistication and expansion abroad, CBRC should ensure preparedness to assess joint ventures and other strategic investments. ### Supervisory approach - CBRC plans and executes a high quality supervisory approach, using broad information sources. - Approach is forward looking and responsive to systemic issues, focusing on emerging risks and trends such as wealth management products and interbank activity. - Assessing resolvability of banks is still work in progress. ### Supervisory techniques and tools - Supervisory practices are of high quality and continue to develop. - Balanced toward off-site (OSS) techniques, with good use of on-site examinations and coordination between on-site and off-site departments. - Intensive investment in supervisory data and analytical systems; refreshed analytical methodologies. - Supervisory expectations are clearly communicated and followed up. - Scope for further development in the use of supervisory judgment and proactive supervisory actions. ### Supervisory reporting - Extensive efforts to enhance supervisory reporting regime and analytical systems. - Almost whole-sale overhaul of reporting data. - Care taken to ensure data reliability and bank accountability; CBRC obtains data relevant for evolving supervisory tasks. ### Corrective and sanctioning powers of supervisors - CBRC has a range of powers enabling early action to address unsafe and unsound practices and has exercised them extensively in recent years. - Deposit insurance fund established in 2014 but has not been accessed thus far. ### Consolidated supervision - CBRC has refreshed consolidated supervision practice and is starting to reap benefits. - Priority on knowledge of intra-group and related party connections, exercise of influence over a group, structure, risk profile, and risk management of banking groups. - CBRC increasingly probes group activities, risk management and strategy. - Need to consider activities and entities in the wider group that could impact the banking entity and its group. - Need for continuous monitoring of wider group structure and activities, including stronger notification and approval powers for CBRC. - More attention needed on cross-sectoral developments, such as growth of WMPs. ### Home-host relationships - CBRC has made significant effort to improve home-host relationships, including increasing number of MoUs. - Establishment of regular colleges for the G-SIBs has enabled more effective outreach to a wider range of host supervisors. - Recovery plans have been put in place. ### Corporate governance - CBRC has progressively updated corporate governance guidelines, adopting a proportionate approach: large/listed banks subject to highest requirements; flexibility for smaller banks such as rural banks. - Supervisory emphasis on assessing corporate governance across on-site examinations and offsite surveillance; assessment is key component of supervisory ratings. - Current regime is a combination of CBRC guidelines and CG Rules for Listed Companies issued by CSRC; taken together comprehensive but areas for enhancement exist. - Areas for enhancement: - Clearer requirements on independence of nominating committee and remuneration committee for non-listed banks. - Explicit requirements for risk management committee to be chaired by, and bear a majority of, independent directors. - Benefit in consolidated, clear and concise guidelines in line with international standards to establish minimum standards for smaller and less complex banks. ### Risk management process - Market complexity and diversity; banks expanding into new lending and other activities in response to competition and macro changes; increasing contribution from small-and-medium sized banks. - Significant progress in banks’ risk management capabilities since previous assessment. - Five large banks have moved to adopting advanced approaches for capital measurement; internal capital assessment program (ICAAP) and stress tests are important for risk management. - For other large and medium sized banks, risk management capabilities vary with scale and complexity. - CBRC issued the Comprehensive Risk Management Guidelines in September 2016 and engaged banks in discussions prior to issuance. - Challenges remain for full enterprise-wide risk approaches that integrate strategy, monitoring, management and stress testing, particularly for banks with cross-regional activities, diverse products or non-standard credit. - Some banks are still working on fully complying with guidelines, addressing IT systems, aggregating non-standard credit, overseas exposures. - Assessing full adoption of enterprise-wide risk approaches and identification/management of risk interactions should remain a supervisory focus. - CBRC thus far required only the four globally systemically important banks to prepare and submit recovery plans annually; need to extend requirement to other large banks that CBRC assesses to be systemically important domestically. - CBRC and banks should further develop stress testing capabilities and enhance robustness of stress testing programs, including stress scenarios design, stress parameters and assumptions, stress testing techniques and interaction of risks under stress. ### Capital adequacy - China has implemented Basel III, setting higher requirements for CET1 and leverage ratio. - Capital is calculated on a solo and consolidated basis. - CBRC has authority to impose additional capital requirements on individual banks as deemed necessary. - CBRC requires, in principle, ICAAP to be implemented for all banks on a proportionate basis. - D-SIBs methodology and regulation are under development. ### Credit risk - Credit risk is the most significant risk factor in the Chinese banking sector. - CBRC’s offsite surveillance has benefitted from enhanced data gathering and information systems to identify and monitor credit risk trends and vulnerabilities. - Numerous onsite examinations on credit risk have been conducted. - Increase in scale and complexity of banks’ credit origination activities, including shift toward non-standard credit activities: investments in structured products, off-balance sheet activities, interbank investments. - Various guidelines and consultation papers issued by CBRC in late 2016 set out requirements and proposed policies to address emerging issues. - Challenge to ensure supervisory expectations are effectively communicated and implemented across all banks and regions. - Banks needed reminders and scrutiny from CBRC to subject these activities to consistent credit risk measurement/management and regulatory requirement, indicating room for better appreciation of risk principles and more robust identification, monitoring and management of bank-wide credit risks. - Recommendation: CBRC should consider developing comprehensive guidance on credit risk management in line with international standards to ensure supervisory expectations and minimum standards are well understood. ### Problem assets, provisions, and reserves - CBRC has focused supervisory effort on ensuring correct loan classification and provisions via offsite surveillance and onsite examinations. - Industry representatives confirmed loan classification and provisioning have been focal points of supervision and external audit in recent years. - Continued supervisory focus needed given strains in several highly indebted corporate sectors coping with overcapacity. - Need to review current loan classification requirements permitting use of collateral in influencing NPL classification. - CBRC estimates collateral impact currently affects only a small proportion of total loans, but permitting such practice complicates assessment of credit risk increases at bank and system-wide levels. - Collateralized loans past due that are not classified as NPLs could result in lower provisions held under CBRC’s minimum requirements. - Need to review requirement permitting loans granted to small enterprises to be classified as NPL only when they are more than 180 days past due to assess whether it results in slow downgrading and delayed detection of rising credit risk in this segment. ### Concentration risk and large exposure limits - CBRC has enhanced supervision of concentration risks and monitors concentration by industries, geographies, corporate groups. - Banks are required to include significant risk concentrations in their stress testing programs. - Under the Company Law, entities with common local government ownership are not considered connected parties by virtue of local government ownership alone; at least one additional relationship is required. - In September 2016 CBRC clarified consideration of “economic interdependence” between parties in making connectedness determinations. - Since 2014, exposures to banks are subject to a regulatory limit of 50 percent of a bank’s tier 1 capital. - That 50 percent limit appears excessive in view of lower inter-bank limits and inter-G-SIB limits as set out in the BCBS large exposures framework which will take effect from 1 January 2019. *People’s Republic of China — IMF country report section: 1. Responsibilities, objectives and powers* ### 20. Transactions with related ### 20. Transactions with related parties ### Findings on definition and scope - The definition of related party is comprehensive, but it does not include related banks. - Ownership by the state government is not treated as a trigger for related party reporting, limits or approvals. - In theory, a commercial bank owned by the local government can lend to local government-owned entities without being covered by the extra due diligence required for related parties. - The Related Party Transactions Rule sets a limit on the aggregate exposures to all related parties of 50% of the bank’s capital, and hence are not as strict as the allowable large exposure limit for a single counterparty or groups of connected counterparties (EC6). ### Regulatory context and supervisory implications - The current treatment permits potential gaps in oversight where common local government ownership creates exposures that escape related-party discipline. - The aggregate related-party exposure limit of 50% of a bank’s capital is identified as less conservative than large-exposure limits, implying higher concentration risk from related-party dealings. ### Key statistics and coverage (as presented elsewhere in chapter) - All banks with assets of no less than RMB200bn are subject to the LCR and this represents approximately 90 percent of the assets of the banking system. - Listed banks account for about 76% of total banking system assets and have appointed international accounting firms as their external auditors. ### Recommended policy actions (from Recommended Actions, Principle 19 and Principle 20) - In line with moving towards adopting Basel large exposures framework: - review and clarify the application of the criterion for identifying relationships between entities with common local government ownership. - reduce the regulatory limit on a bank’s interbank exposures (excluding intraday interbank exposures) to 25 percent of its Tier 1 capital and establish a lower limit of 15 percent of Tier 1 capital on a G-SIB’s exposures to another G-SIB. - Principle 20 specific recommendations: - Review and bring common ownership of enterprise by local governments into the definition and discipline of related party transactions. - Reduce the limit on aggregate related party exposures of 50% of a bank’s capital to a level more consistent with the limits on large exposures. *Source: IMF Financial Sector Assessment — chapter "20. Transactions with related parties" from cr17403.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17403.pdf_