Banks told to beef up risk controls (China Daily) Updated: 2005-03-29 08:46
China's lenders were given notice yesterday to strengthen their internal
controls and improve risk management by the nation's banking regulator.
And, in the wake of a recent spate of financial scandals, the China Banking
Regulatory Commission pledged further scrutiny of bank fraud.
The commission alerted lenders yesterday to the potential risks in
derivatives trading, urging them to strictly abide by the rules governing this.
The notice was published just one day after the banking regulator demanded
the nation's lenders do more to watch out for potential operational risks.
This is an indication that the regulator is working hard to improve domestic
banks' risk controls before foreign competitors flood into the market.
"Risk control is vital for Chinese banks at the moment," said Yi Xianrong, a
senior economist at the Chinese Academy of Social Sciences.
In line with China's commitments to the World Trade Organization, foreign
banks will be allowed unrestricted access to the nation's market by the end of
next year.
Chinese banks are now working hard to improve their corporate governance in
the face of this impending competition.
In a statement issued yesterday, the regulatory commission asked banks to
improve their management of derivatives dealings and establish a sound
risk-reporting mechanism.
It said that banks already granted licences to trade derivatives should start
self-inspection and submit their inspection reports to the banking regulator.
Any bank trading in derivatives without a licence will be punished, with the
officials involved facing legal proceedings.
The rule is a very important one for Chinese banks, which lack concrete
measures to punish wrongdoers, according to Yi.
The commission also urged local regulatory bureaux to closely scrutinize
local financial institutions in order to guard against irregularities and
malpractice.
It also issued a 13-point circular to banks on how to improve their control
of operational risks.
Instructions in the circular referred to establishing rules and regulations
on risk controls, strengthening internal checks and the management of local
branches, and the shifting of major officials at local financial institutions.
"Some banks' weak ability to handle operational risks failed to keep in line
with the development of the banking sector," the commission said.
"Their inadequate rules, ineffective inspection and poor internal controls
have already led to severe problems, causing huge losses to the banking
industry."
Fraud totalling 115 million yuan (US$13.9 million) was recently uncovered by
the commission at branches of the Agricultural Bank of China in Baotou, a city
in the Inner Mongolia Autonomous Region in northern China.
A man who worked as a typist at the Bank of China has also been arrested and
charged for fraudulently obtaining US$6 million from the State bank, now
earmarked for a multi-billion-dollar public share offering.
China Construction Bank Chairman Zhang Enzhao also quit this month for
"personal reasons" amid corruption allegations.
The commission said China's banks need to attach greater importance to the
industry's credit risks, market risks and operational risks, as required by
Basel II, the new global accord on bank capital standards.
China's banking regulators, though acknowledging the vast difficulties for
local banks in complying with the new capital requirements, are eager to promote
Basel II.
The commission is actively encouraging the nation's big banks to intensify
their efforts to take a internal-ratings-based approach in accordance with Basel
II requirements and improve their risk management.
Last Wednesday, the commission said it would carry out on-the-spot checks at
10 commercial banks to ensure they were properly classifying how risky their
loans are.
The commission also demanded better computer systems to automatically detect
wrongdoing and risks.
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