CBIRC Evaluates Governance at Banks, Proposes Licensing Measures

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