CBIRC issued the results of the corporate governance evaluation of banking and insurance institutions in 2020. Nearly 1,792 institutions participated in the evaluation, including 1,605 commercial banks and 187 insurance institutions. The evaluation covered eight key dimensions: party leadership, shareholder governance, board governance, board of supervisors and senior management governance, internal risk control, related-party transaction governance, market restraint, and other stakeholder governance. The analysis showed positive results in the development and reform of governance in banking and insurance sectors in China but also identified certain gaps in relation to the governance at these institutions.
CBIRC conducted this evaluation of the corporate governance of these institutions as an important measure to resolutely fight to prevent and resolve major financial risks. The evaluation showed that compliance of shareholder behavior of bancassurance institutions has improved and the conduct of improper transfer of benefits through related party transactions has been curbed to a certain extent while the operational efficiency of governance entities such as the board of directors, the board of supervisors, and senior management has improved. Post evaluation, the participating entities were rated as excellent (A), good (B), pass (C), weak (D), and poor (E). Most institutions were concentrated in the B and C categories, with 209 institutions being rated as weak (D), 182 institutions rated as poor (E), and one institution rated as excellent (A). The following are the key deficiencies identified in the assessment:
- In terms of shareholder governance, some institutions, especially small and medium-sized institutions, have opaque and irregular equity relationships, and non-compliant and imprudent shareholder behavior. Among them, equity management issues are particularly prominent.
- With respect to the board governance aspects, at some institutions, the director’s independence is insufficient and some directors have insufficient ability to perform their duties. A small number of institutions unilaterally pursue short-term performance, clearly propose to vigorously develop so-called low-capital or zero-capital-consumption credit businesses, and substantively develop loan businesses through trusts, brokerages, and other channels to circumvent credit regulatory policies and fail to achieve effective risk isolation. Some banks use large amounts of credit funds for long-term inter-bank investment or to invest in major shareholders and the quality of their assets is worrying , while potential risks are prominent.
- Issues with remuneration and compensation structure at the senior levels have also been identified, as the pay structure does not meet regulatory requirements and some institutions' basic pay in total remuneration proportion is too high.
- There exists a lack of institutional risk management, internal control, and internal audit in certain problem cases. Some institutions have not established an independent risk management department and some institutional risk management systems do not cover all business processes and key operational links. Some institutions have not established an independent internal audit system, the number of internal auditors does not meet the regulatory requirements, and the compliance control is not in place.
- Some institutions have serious weaknesses in the governance of related-party transactions. The identification of related parties is not strict, as some institutions fail to include companies controlled by directors and their close relatives into related-party management. Some institutions have relaxed the review of related-party credit, or deliberately evaded supervision, and used complex business models to issue large amounts of loans to related parties in disguise.
- In some organizations' annual reports, there is no disclosure of information such as the board of directors and senior management's ability to monitor risks, the work of independent directors and external supervisors, and the remuneration of directors, supervisors and senior management personnel. Moreover, information disclosure is not timely as some organizations’ annual reports are published later than regulatory requirements.
- Some institutions need to deepen the protection of the rights and interests of other stakeholders. The participation of stakeholders in corporate governance is relatively low. Some banks have not implemented relevant regulatory requirements for green credit.
Based on the feedback CBIRC provided to the participating entities, CBIRC urges all institutions to earnestly rectify the identified issues. The entities are also expected to implement classified regulatory measures in response to corporate governance issues found in the assessment. For violations of laws and regulations, serious investigation and punishment will be meted out. Another recommendation is to strengthen the application of evaluation results in daily supervision work and to further improve the supervision and evaluation of corporate governance. In a separate announcement, CBIRC published a consultation on the draft “measures for the administration of banking and insurance institution licenses.” The measures, via 22 articles, focus on integrating the licenses issued by the CBIRC to bancassurance institutions into three categories: financial licenses, insurance licenses, and insurance intermediary licenses. The comment period for these draft measures ends on February 21, 2021.
Related Links (in Chinese)
- Press Release on Governance Framework
- Results of Governance Evaluation
- Press Release on Licensing Measures
- Notice on Draft Licensing Measures
Comment Due Date: February 21, 2021
Keywords: Asia Pacific, China, Banking, Governance, ESG, Bank Licenses, Governance Framework, CBIRC
Previous ArticleBIS Innovation Hub Sets Out Work Program for 2021
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.
The use cases of generative AI in the banking sector are evolving fast, with many institutions adopting the technology to enhance customer service and operational efficiency.
As part of the increasing regulatory focus on operational resilience, cyber risk stress testing is also becoming a crucial aspect of ensuring bank resilience in the face of cyber threats.
A few years down the road from the last global financial crisis, regulators are still issuing rules and monitoring banks to ensure that they comply with the regulations.
The European Commission (EC) recently issued an update informing that the European Council and the Parliament have endorsed the Banking Package implementing the final elements of Basel III standards
The Swiss Federal Council recently decided to further develop the Swiss Climate Scores, which it had first launched in June 2022.