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 Australian Prudential Regulation Authority (APRA) released the final Prudential Practice Guide on management of climate change financial risks (CPG 229) for banks, insurers, and superannuation trustees.
The European Council adopted its position on two proposals that are part of the digital finance package adopted by the European Commission in September 2020, with one of the proposals involving the regulation on markets in crypto-assets (MiCA) and the other involving the Digital Operational Resilience Act (DORA).
The Prudential Regulation Authority (PRA) is proposing, via the consultation paper CP21/21, to apply group provisions in the Operational Resilience Part of the PRA Rulebook (relevant for the Capital Requirements Regulation or CRR firms) to holding companies.
The European Commission (EC) has adopted a package of measures related to the Capital Markets Union.
The European Banking Authority (EBA) published the final report on draft regulatory technical standards for the calculation of risk-weighted exposure amounts of collective investment undertakings or CIUs, in line with the Capital Requirements Regulation (CRR).
The Board of Governors of the Federal Reserve System (FED) published a report that summarizes banking conditions in the United States, along with the supervisory and regulatory activities of FED.
The Australian Prudential Regulation Authority (APRA) recently completed two pilot initiatives in its 2020-2024 Cyber Security Strategy, which was published in November 2020.
The Basel Committee on Banking Supervision (BCBS) published further information related to its 2021 assessment of global systemically important banks (G-SIBs), with additional details to help understand the scoring methodology.
The Financial Accounting Standards Board (FASB) is consulting on an Accounting Standards Update and the associated taxonomy improvements for requirements on troubled debt restructurings and vintage disclosures under the credit losses standard (for financial instruments) topic 326.
US Agencies issued a statement that summarizes the work undertaken during the interagency policy sprints focused on crypto-assets and provides a roadmap of future work related to crypto-assets.