Banking Regulation 2022

Last Updated October 26, 2021

China

Law and Practice

Authors



Jingtian & Gongcheng is one of the first private and independent partnership law firms in China. The firm boast expertise in capital markets, mergers and acquisitions, cross-border investments, dispute resolution, banking and finance, asset management, investment funds, private equity and venture capital, real estate and construction, intellectual property, employment and labour, cybersecurity and data protection, and a range of industry sectors including technology, media and telecommunications and healthcare. Headquartered in Beijing, Jingtian & Gongcheng advises its clients through offices located in China’s key economic centres, including Shanghai, Shenzhen, Chengdu, Tianjin, Nanjing, Hangzhou, Guangzhou, Sanya and Hong Kong, enabling close collaboration with clients. The firm maintains more than 200 partners and approximately 500 lawyers and legal assistants. Many of the firm's lawyers graduated from top-tier Chinese and international law schools and maintain solid technical capabilities and commercial know-how.

In the financial sector of the People's Republic of China (PRC), the People’s Bank of China has historically assumed multiple functions such as monetary policy, financial operations, and organisational management. With the complexity of the financial risk structure, the problem of lack of co-ordination and lack of supervision in financial supervision has emerged. In 2017, the Financial Stability and Development Committee of the State Council (the "Financial Committee") was established to co-ordinate the major issues of financial reform, development and supervision, and to enhance the authority and effectiveness of financial supervision.

In the banking sector, the regulators responsible for supervising banks in mainland China are the People's Bank of China (PBOC), the China Banking and Insurance Regulatory Commission (CBIRC) as well as the State Administration of Foreign Exchange (SAFE).

The PBOC is the PRC’s central bank, with primary responsibilities including the formulation and implementation of monetary policies, and maintaining the stability of the banking industry. The CBIRC is the main agency for the supervision of banking institutions in the PRC. SAFE is mainly responsible for foreign exchange administration.

The principal laws and regulations governing the mainland China’s banking sector are:

  • the Law of the PRC on the People's Bank of China (the "Law on the People's Bank of China");
  • the Law of the PRC on Commercial Banks (the "Law of Commercial Banks");
  • the Banking Supervision Law of the PRC (the "Banking Supervision Law");
  • the Anti-Money Laundering Law of the PRC (the "Anti-Money Laundering Law");
  • the Regulation of PRC on the Administration of Foreign-Funded Banks (the "Regulation on the Administration of Foreign-Funded Banks"); and
  • the Regulation of the PRC on Foreign Exchange Administration (the "Regulation on Foreign Exchange Administration").

In order to conduct banking service, a Chinese firm may apply for a separate financial licence and a separate business licence. The financial licence is issued by the CBIRC to specially permit carrying out banking financial business in China.

Activities and Services Covered

According to Article 3 of the Law of Commercial Banks, once authorised, a commercial bank may conduct the following business activities in part or in whole:

  • absorbing public deposits;
  • offering loans in various terms;
  • arranging settlement of both domestic and overseas accounts;
  • handling acceptance and discount of negotiable instruments;
  • issuing financial bonds;
  • issuing, cashing and undertaking the sale of government bonds as agents;
  • buying and selling government bonds or financial bonds;
  • undertaking inter-bank borrowing or lending;
  • buying and selling foreign exchange by itself or as agents;
  • engaging in bank card business;
  • offering L/C services and guarantee;
  • handling receipts and payments and insurance business as agents;
  • providing safe boxes services; and other businesses as approved by the banking regulatory organ of the State Council; and
  • after getting the approval from a foreign exchange administrative organ, a financial institution may also operate the foreign exchange sale or settlement business.

Conditions for Authorisation

Pursuant to the Law of Commercial Bank, requirements for establishing a commercial bank include:

  • having Articles of Association in accord with the provisions of the Law of Commercial Bank and the PRC Company Law;
  • having a registered capital that meets the minimum amount requirement – for establishing a national commercial bank shall be CNY1 billion, for establishing a city commercial bank shall be CNY100 million, for a rural commercial bank the minimum amount of registered capital shall be CNY50 million;
  • having directors and senior management personnel with professional knowledge for holding the post and corresponding work experiences;
  • having sound organisations and management systems; and
  • having a place of business accompanied with safeguard measures meeting the requirements and other facilities in relation to the business.

The Process for Applying

According to the Law of Commercial Banks, following materials shall be firstly submitted to the CBIRC:

  • an application, specifying the name, location, amount of registered capital, and business scope of the commercial bank to be set up; and
  • a feasibility study report.

Once the above-mentioned materials are submitted, an applicant shall fill in a formal application, attaching the following documents and materials:

  • the draft of the Articles of Association;
  • qualification certificates of the directors and senior management personnel to be hired;
  • certificate of capital issued by a legal capital checking organ;
  • name list of shareholders and the amount of capital contributions and shares thereof;
  • certificates of credibility and relevant documents of the shareholders who hold more than 5% of the registered capital;
  • business policies and plans; and
  • place of business accompanied with the safeguard measures and documents of other facilities in relation to the business.

Timelines and Costs for Authorisation

According to the Measures for the Administration of Licenses of Banking and Insurance Institutions (2021), a banking institution formed with approval shall, within ten days from the date of receiving an administrative licensing decision, obtain a licence from CBIRC or its local office.

As for foreign applicants, according to the PRC Regulation on the Administration of Foreign-Funded Banks, CBIRC shall, within two months of receipt of the complete application materials, make a decision as to whether approve it or not, and notify the applicant in writing.

Currently, pursuant to Chinese effective laws and regulations, there is no cost for applying the financial licence.

Once approved, the CBIRC or its local offices shall issue financial licenses.

According to the Law of Commercial Banks, the alteration of shareholders who hold more than 5% of the total amount of capital or shares of a commercial bank shall be subject to the approval of the banking regulatory organ of the State Council.

The Interim Measures for the Equity Management of Commercial Banks issued in 2018 (the "Measures") is the implementation rules for management of commercial bank equity, which has set different regulatory conditions according to the different shareholding ratios for the commercial banks’ shareholders. The Measures have tightened the CBIRC's regulation of the information disclosure and reporting requirements imposed on material shareholders that have a significant impact on the operation and management of commercial banks established in China. Pursuant to the Measures, shareholders who hold more than 5% of the shares or voting rights of a commercial bank, or hold less than 5% of the total capital or total shares but have a significant impact on the operation and management of the commercial bank will be regarded as the major shareholders of the commercial bank and shall be managed in accordance with the relevant regulations of the Measures.

Chinese-Funded Banks

According to Implementation Measures for the Administrative Licensing Items concerning Chinese-Funded Commercial Banks (2018 Amendment), the equity change of a Chinese-funded commercial bank must meet the following review, acceptance or reporting requirements:

State-owned commercial bank, the postal savings bank or a joint-stock commercial bank

An application for the change of a shareholder holding 5% or more of the total capital or shares, or an application for an overseas financial institution’s equity investment shall be accepted, reviewed and decided by the CBIRC.

An application for the change of a shareholder holding 1% or more but less than 5% of the total capital or shares shall be reported to the CBIRC within ten days after the equity transfer.

Urban commercial banks

An application for the change of a shareholder holding 5% or more of the total capital or shares, or an application for an overseas financial institution’s equity investment shall be accepted, reviewed and decided by the local provincial CBIRC branch agency.

An application for the change of a shareholder holding 1% or more but less than 5% of the total capital or shares shall be reported to the local provincial CBIRC branch agency within ten days after the equity transfer.

Foreign-Funded Banks

According to Regulation on the Administration of Foreign-Funded Banks (2019 Amendment), when a foreign-funded bank changes its shareholders or adjusts the shareholding proportion of its shareholders, it shall be subject to the approval of the CBIRC, shall submit application materials as required, and undergo the relevant registration procedure with the administration for market regulation.

The above-mentioned review, acceptance or reporting requirements belong to administrative licensing requirements, which are compulsory requirements and mandatory obligations on banking institutions.

The Notice by the CBIRC Regarding Issuing the Corporate Governance Standards for Banking or Insurance Institutions was launched in 2021. According to Article 4 of the Notice, CBIRC requires that the banking institution shall continue raising the level of corporate governance, and gradually reach the standards of good corporate governance.

A Good corporate governance shall include without limitation the following:

  • a clear equity structure;
  • a sound organisational structure;
  • clear boundaries of duty;
  • a scientific development strategy;
  • high standards of professional ethics;
  • effective risk management and internal control;
  • a sound information disclosure mechanism;
  • a reasonable incentive and restraint mechanism;
  • a good stakeholder protection mechanism;
  • strong awareness of social responsibility.

Pursuant to the Notice by the CBIRC Regarding Issuing the Corporate Governance Standards for Banking or Insurance Institutions (2021), a banking institution shall, in accordance with the PRC Company Law, establish a corporate governance structure consisting of the shareholders' meeting, the board of directors, independent directors, special committees of the board of directors, the board of supervisors, senior management, and other governance bodies.

A banking institution shall disclose important information on the company, including financial condition, information on material risk, and information on corporate governance; and it shall establish a comprehensive risk management system that covers all business processes and operational steps, and is proportional to the risk condition of the company.

Corporate documents a banking institution shall prepared include the company's bylaws; the procedural rules of the shareholders' meeting, the board of directors' meeting, and the board of supervisors' meeting, as well as the company's risk tolerance, risk management, and internal control policies.

Chinese-Funded Banks

Persons required to go through the licensing process

Pursuant to Implementation Measures of the CBIRC for the Administrative Licensing Items concerning Chinese-Funded Commercial Banks, the chairman, vice chairman, independent directors, and other members of the board of directors, and the secretary to the board of directors of a Chinese-funded commercial bank shall go through the licensing for their office qualifications.

The president, vice president, assistant to president, chief risk officer, chief compliance officer, general auditor, general accountant, chief information officer, and senior executives of the same rank of a Chinese-funded commercial bank shall also go through the licensing for their office qualifications.

Conditions

To apply for qualification as a director or senior executive of a Chinese-funded commercial bank, the proposed person shall meet the following basic conditions:

  • has a full capacity for civil conduct;
  • has a good record of compliance with laws and regulations;
  • has good characters and reputation;
  • has the relevant knowledge, experience, and capability necessary for holding the office;
  • has a good practicing record in the economic or financial field;
  • has a sound personal and family;
  • has the independency that is necessary for holding the office; and
  • performs the duties of loyalty and diligence to the financial institution.

To apply for the qualifications of a director of a Chinese-funded commercial bank, the following additional conditions should also be met:

  • has more than five years of legal, economic, financial, financial or other work experience conducive to the performance of directors’ duties;
  • is able to use the financial statements and statistical reports of financial institutions to judge the management and risk status of financial institutions;
  • understands the corporate governance structure, the bylaws and duties of the board of directors of the proposed organisation; and
  • to apply for the qualification of independent director of a Chinese-funded commercial bank, the proposed person should also be an expert in law, economics, finance or accounting, and comply with relevant laws and regulations.

Process for licensing

An application for qualification as a director or senior executive of a State-owned Commercial Bank, a Postal Savings Bank, a Joint-stock Commercial Bank as well as the business department of the head office shall be submitted to the CBIRC by the banking institution, and be accepted, reviewed and decided by the CBIRC. The CBIRC shall make a written decision on approval or disapproval within 30 days from the date of acceptance.

The application for the qualifications of directors and senior management personnel of urban commercial bank institutions, their branches, and their branch-level franchised institutions shall be submitted by the urban commercial bank institutions to the CBIRC’s local or city-level dispatched institution or to the CBIRC’s provincial-level dispatched institution for acceptance and preliminary review. The CBIRC’s provincial dispatched agency shall review the application and make a decision. The provincial dispatched agency shall make a written decision of approval or disapproval within 30 days from the date of receipt of the complete application materials.

Where the proposed person has previously served as the chairman of the board of directors or a senior manager of a financial institution, the applicant shall submit the proposed person’s resignation audit report or economic responsibility audit report when submitting the qualification application materials.

Foreign-Funded Banks

General requirements

A director, senior executive, or chief representative of a foreign-funded bank shall not take office before his office qualification is confirmed by the CBIRC or the local CBIRC office at the place where it is located.

Conditions

A proposed person shall not serve as director, senior executive, or chief representative of a foreign-funded bank if they:

  • have any record of a crime committed intentionally or in gross negligence;
  • have a misconduct record of social morality, having caused execrable effect;
  • are liable personally or as a direct leader for a business activity in violation of laws or regulations or heavy loss of a previous employer, and the circumstances are serious;
  • are or were a director or a senior executive of an institution which has been taken over, liquidated, or declared bankrupt or whose business license has been revoked, unless it can be proved that he is not personally liable for the taking over, liquidation, declaration of bankruptcy, or revocation of business license;
  • have violated a professional ethics or code of conduct or serious neglect of duties has caused major losses or execrable effect;
  • have instigated or participated in their employer's non-cooperation in lawful regulation or case investigation and handling;
  • have been disqualified for life from serving as a director or senior executive, or has been punished by the regulatory authority or other financial management departments twice or more cumulatively;
  • have either themselves of their spouse have a relatively large amount of due debt that have not been repaid, including but not limited to overdue loans borrowed from the foreign-funded bank;
  • are subject to any other evident conflict of interest between an office currently held and the office to be held by a person, or he is evidently distracted from fulfilment of duties in terms of time and energy;
  • do not meet the conditions for office qualifications prescribed in the Measures, and confirmation of satisfaction of office qualifications is obtained by illegal means; and
  • are prohibited by laws, administrative regulations, or departmental rules from serving as a director, senior executive, or chief representative of a financial institution.

Process

After a foreign-funded bank submits the application materials for confirmation of satisfaction of office qualifications, the CBIRC or the local CBIRC office at the place where it is located may hold an interview with the proposed person before he holds office.

Directors, senior executives and chief representatives of a foreign-funded bank that must be subject to confirmation of satisfaction of office qualifications shall be governed by the provisions of the rules on administrative licensing of foreign-funded banks.

Accountability Requirements

A director of a banking or insurance institution shall perform the following duties or obligations:

  • continuously paying attention to operating and management condition of the company, and having the power to require the senior management to provide relevant materials reflecting the operating and management condition of the company in a comprehensive, timely, and accurate manner or give explanations on relevant issues;
  • attending the meetings of the board of directors on time, sufficiently examining the matters deliberated by the board of directors, giving opinions independently, professionally, and objectively, and voting independently on the basis of prudential judgment;
  • assuming responsibility for the resolutions of the board of directors
  • supervising the implementation of the resolutions of the shareholders' meeting and the board of directors by the senior management;
  • actively participating in training organised by companies and regulatory authorities, among others, understanding the rights and obligations of directors, being familiar with relevant laws, regulations, and regulatory requirements, and continuing to have the professional knowledge and capabilities required to perform duties;
  • when performing duties, being responsible to the company and all shareholders, and treating all shareholders fairly;
  • complying with high standards of professional ethics, and taking into account the lawful rights and interests of stakeholders;
  • having an obligation of loyalty and diligence to the company, performing duties dutifully and prudentially, and ensuring sufficient time and energy to perform duties; and
  • complying with laws, regulations, regulatory provisions, and the company's bylaws

An senior management officer of a banking institution shall comply with laws, regulations, regulatory provisions, and the company's bylaws, engage in proper professional conduct, abide by high standards of professional ethics, have obligations of loyalty and diligence to the company, perform duties in good faith, dutifully, and prudentially, and guarantee that they have sufficient time and energy to perform duties, and may not be slack in performing duties or perform duties beyond authority.

The Banking Institutions Remuneration Requirements

Regarding remuneration requirements, China has issued the Notice of CBIRC on Issuing the Supervisory Guidelines on Sound Compensation in Commercial Banks (2010), which can be applied to all the employees of banking institutions, and the Notice by the CBIRC of Issuing the Guiding Opinions on Establishing and Improving the Mechanism of Banking and Insurance Institutions for the Recourse and Deduction of Performance-Based Compensation (2021), which mainly applies to directors and supervisors who receive performance-based compensation from banking institutions, senior executives and personnel holding key positions in the banking institutions.

A commercial bank shall design a uniform compensation management system, which shall be composed of fixed compensation, variable compensation, fringe benefits, etc. Fixed compensation is the basic compensation. The variable compensation includes performance-based compensation and various mid- and long-term incentives. Fringe benefits include insurance premiums and housing accumulation fund.

Compensation mechanism

The compensation mechanism shall be in line with the following principles:

  • the compensation mechanism shall be consistent with the corporate governance requirements of the bank;
  • the compensation incentives shall be in alignment with the bank's building of competitiveness and sustainability;
  • the payment level shall be symmetric with the business performances after adjustment of the risk costs;
  • the short-term incentives work in harmony with the long-term incentives.

Compensation management system

The compensation management system shall include:

  • a system of classification of posts and positions of bank employees, and the corresponding compensation standards;
  • the brackets of basic compensation, and the upgrading measures;
  • the brackets of performance-based compensation and administrative measures for the assessment of performances;
  • the administrative measures for assessment for purposes of mid- and long-term incentives and special awards.

Performance-based compensation

Under any of the following circumstances, a banking institution shall recover and deduct the performance-based compensation of senior executives and personnel holding key positions with main responsibility during the corresponding period, in whole, and recover and deduct the performance-based compensation of other responsible persons during the corresponding period, in part:

  • when important regulatory indicators seriously fail to meet standards or deviate from a reasonable range;
  • when risk disposal measures such as takeover have been taken by the CBIRC and its local office or other financial regulatory authority;
  • when a major risk event occurs and has caused adverse impact on the order of the financial market;
  • other circumstances that cause major damage to the property and reputation, among others, of the banking and insurance institution.

The Regulators' Supervisory Regime

The CBIRC shall take the compensation management of a commercial bank as an important item of corporate governance and assess the soundness and effectiveness of the compensation management mechanism of the commercial bank once a year. The CBIRC shall also monitor the dynamic information about implementation of the compensation management system of commercial banks, and conduct on-site inspection of the commercial banks' execution of the risk control indicators and other indicators for assessment.

Consequences of Breaching the Requirements

According to Notice of CBIRC on Issuing the Supervisory Guidelines on Sound Compensation in Commercial Banks, if the compensation management system and the performance assessment indicators of a commercial bank do not meet the relevant provisions, the CBIRC has the power to order it to make a correction under relevant provisions of the PRC Banking Supervision Law, and investigate and deal with the following problems:

  • failing to meet the relevant provisions with respect to the compensation management organisational framework or compensation management system;
  • failing to assess, execute or file the performance-based assessment measures or annual compensation plan for archival purposes;
  • failing to strictly conduct performance assessments, failing to conduct performance assessments, or committing fraudulent conducts during any performance assessment;
  • failing to compute and pay basic compensation or arrange for deferred performance-based compensation;
  • failing to require refund of or cease paying the performance-based compensation under relevant provisions;
  • failing to disclose the compensation information under relevant provisions; and
  • failing to meet the relevant policies and provisions of the state.

China launched the Measures for the Supervision and Administration of Combating Money Laundering and Financing of Terrorism by Financial Institutions in 2021, in which stipulates the internal control and risk management by financial institutions, the supervision and administration of combating money laundering and financing of terrorism and corresponding legal liabilities.

The main requirements include that a financial institution shall establish and improve the internal control system for combating money laundering and financing of terrorism, assess risks of money laundering and financing of terrorism, establish a risk management mechanism commensurate with the risk status and business scale, build an information system for combating money laundering, and establish or designate a department and appoint corresponding personnel to effectively perform the obligations of combating money laundering and financing of terrorism.

Specifically, the financial institutions shall establish and improve an internal control system for combating money laundering and financing of terrorism, and self-assess risks on a regular and irregular basis and report the self-assessment situation to the PBOC and its relevant branch office. The financial institutions shall also set up special departments to take the lead in conducting the management work of combating money laundering and financing of terrorism, establish an audit mechanism for combating money laundering and financing of terrorism.

The PBOC and its branch offices shall, under the risk-based principle and principle of regulating legal persons, rationally use various regulation methods to realise effective regulation of different types of financial institutions. The PBOC and its branch offices may also notify the CBIRC or its dispatched institutions of the supervision and administration of financial institutions' combating money laundering and financing of terrorism.

When a financial institution violates the relevant provisions of these Measures, the PBOC or its branch offices shall recommend the CBIRC punish them according to the PRC anti-Money laundering law:

  • to order the financial institution to correct within a time limit;
  • under serious circumstances, to order the financial institution to give a disciplinary sanction to its directly liable chairperson, senior manager or any other person according to law and a fine of CNY20,000 up to CNY50,000 shall be imposed on the financial institution and a fine of CNY10,000 up to CNY50,000 shall be imposed upon its directly liable chairman, senior manager or any other person.

The Law of Commercial Banks has set up a special chapter for the protection of depositors.

Principles

According to The Law of Commercial Banks, regarding protections for the depositors, commercial banks shall follow the principles of voluntary deposit and free withdrawal, paying interest to depositors and keeping secret for depositors in handling individual savings deposits.

Commercial banks have the right to refuse any entity or individual to inquire about, freeze or deduct individual savings accounts or account of an enterprise, unless it is otherwise prescribed by laws.

Protection Regime

A commercial bank shall determine its own interest rates in accordance with the upper and lower limits for deposit interests set by the People's Bank of China and make announcement.

A commercial bank should pay a certain amount of deposit reserve fund to the People's Bank of China and keep adequate payment funds in accordance with the provisions of the PBOC.

A commercial bank shall guarantee the payment of principals and interests of the deposits, and shall not delay or refuse to pay the principals or interests of the deposits.

Deposit Insurance System

In 1993, China proposed a deposit insurance system for the first time. The Deposit Insurance Regulations implemented in May 2015 stipulate that the insurance premiums for deposit insurance shall be collected and managed by the PBOC, and deposit insurance institutions are also established within the PBOC.

The deposit insurance system is a financial security system. It is an insurance institution established by various depository financial institutions.

Each depository institution, as an insured member, pays insurance premiums to the insurance institution according to a certain deposit ratio, establishes deposit insurance reserves, and acts as a member institution. In the event of a business crisis or bankruptcy of the member institution, the deposit insurance institution shall provide financial assistance or directly pay part or all of the deposit to the depositor.

According to the Deposit Insurance Regulation, the deposit insurance has a coverage limit, and the maximum amount of coverage is CNY500,000. The PBOC may, together with relevant departments under the State Council, adjust the maximum amount of coverage in view of factors such as economic situation, changes in the deposit structure, and financial risk status, but shall submit it to the State Council for approval before publication and implementation.

If the amount of principal and interest of deposits in all insured deposit accounts owned by the same depositor at the same institutional policyholder is less than the maximum amount of coverage, the deposits shall be paid in full. The portion in excess of the maximum amount of coverage shall be paid with the liquidated property of the institutional policyholder.

Upon paying the insured deposits of a depositor, the deposit insurance fund management institution acquires the depositor's claim against the institutional policyholder in the same order of liquidation.

Main Requirements

According to the Law of Commercial Banks, in handling individual savings deposits, commercial banks shall follow the principles of keeping secret for depositors. The Law also stipulates that no employee of a commercial bank may divulge any state or commercial secret they acquire during their term of service.

According to the Implementation Measures of the PBOC for Protecting Financial Consumers' Rights and Interests, The bank or payment institution and its employees shall strictly keep confidential consumers' financial information, and shall not divulge such information or illegally provide such information to any other person. When it is confirmed that the information is divulged, damaged or lost, the bank or payment institution shall immediately take remedial measures; if the leakage, damage or loss of information is likely to endanger the personal or property safety of financial consumers, the bank or payment institution shall immediately report to the PBC branch office at the place of its domicile and inform financial consumers. If the leakage, damage or loss of any information may have any other adverse impact on financial consumers, it shall inform financial consumers in a timely manner, and report to the PBOC branch office at the place of its domicile within 72 hours. The PBOC branch office shall, after receiving the report, handle it in accordance with Article 55 of these Measures as the case may be, which will be demonstrated below.

Pursuant to the recently implemented PRC Personal Information Protection Law, personal information processors, including banking institutions, shall, on the basis of the purposes and methods of processing of personal information, categories of personal information, the impacts on individuals' rights and interests, and potential security risks, take the following measures to ensure that personal information processing activities comply with the provisions of laws and administrative regulations, and prevent unauthorised access to as well as the leakage, tampering or loss of personal information:

  • developing internal management rules and operating procedures;
  • conducting classified management of personal information;
  • taking corresponding security technical measures such as encryption and de-identification;
  • determining in a reasonable manner the operation privileges relating to personal information processing, and providing security education and training for employees on a regular basis; and
  • developing and organising the implementation of emergency plans for personal information security incidents.

Where leakage, tampering or loss of personal information occurs or may occur, a personal information processor, including banking institutions, shall immediately take remedial measures, and notify the authority performing personal information protection functions and the relevant individuals. The notice shall include the following matters:

  • the categories of personal information that is or may be leaked, tampered with or lost, and the causes and possible harm of the leakage, tampering or loss of the personal information;
  • remedial measures taken by the personal information processor and measures the individuals can take to mitigate the harm; and
  • the contact information of the personal information processor.

Principal Exceptions

According to the PRC Personal Information Protection Law, under the following circumstances, the personal information processors, including banking institutions, may process personal information with no personal consent required: 

  • the processing is necessary for the conclusion or performance of a contract to which the individual is a contracting party or for conducting human resource management under the labour rules and regulations developed in accordance with the law and a collective contract signed in accordance with the law;
  • the processing is necessary to fulfil statutory functions or statutory obligations;
  • the processing is necessary to respond to public health emergencies or protect the life, health or property safety of natural persons under emergency circumstances;
  • personal information is processed within a reasonable scope to conduct news reporting, public opinion-based supervision, or other activities in the public interest;
  • the personal information that has been disclosed by the individuals themselves or other personal information that has been legally disclosed is processed within a reasonable scope in accordance with this law; or
  • where laws provide for the personal information processing in the process of statistical or archives administration activities organised and implemented by the people's governments at various levels and relevant departments thereof, such provisions shall prevail.

Consequences of Breach

According to the Law of Commercial Banks, where any employee of a commercial bank divulges state or commercial secrets he acquires during his service, he shall be imposed disciplinary punishment; or shall be subject to criminal liabilities if his act is so serious as to constitute a crime.

As for banking institutions, according to Article 55 of the Implementation Measures of the PBOC for Protecting Financial Consumers' Rights and Interests as mentioned above, where a bank or payment institution infringes upon financial consumers' lawful rights and interests, such as that the personal information is divulged, damaged or lost, the PBOC or its branch office may take the following measures:

  • requiring the submission of a written explanation or commitment;
  • holding an interview;
  • ordering rectification within a prescribed time limit;
  • reporting the relevant information to the institution at a higher level and industry regulatory department as the case may be, or releasing information within the industry or to the public;
  • advising the bank or payment institution to take disciplinary actions against the directly responsible directors and senior executives and other directly liable persons;
  • conducting investigation and punishing the violator in accordance with the law or advising any other administrative department to conduct investigation and punish the violator in accordance with the law.

On 3 May 2011, the CBIRC issued the Guiding Opinions on the Implementation of New Regulatory Standards in China’s Banking Sector. In June of 2012, the Administrative Measures for the Capital of Commercial Banks (Trial) was launched, which marked the beginning of China’s formal implementation of the Basel Agreement III. Later in 2015, the CBIRC launched the Measures for the Liquidity Risk Management of Commercial Banks, which was amended in 2018. The regulatory requirements set by China's banking regulatory authorities can already cover the requirements of Basel III standards, and most banks have already met these requirements.

Quantity and Quality of Capital Requirements

According to Administrative Measures for the Capital of Commercial Banks (for Trial Implementation), capital adequacy ratio regulation requirements for commercial banks include minimum capital requirement, capital reservation buffer and countercyclical capital requirements, additional capital requirement for systematically important banks, and capital requirement under the Second Pillar.

Commercial banks' capital adequacy ratio at each tier must meet the following minimum requirements:

  • Core Tier 1 capital adequacy ratio shall be not lower than 5%;
  • Tier 1 capital adequacy ratio shall be not lower than 6%; and
  • Capital adequacy ratio shall be not lower than 8%.

Commercial banks shall set aside a capital reservation buffer after meeting the minimum capital requirements. Capital reservation buffer shall be 2.5% of risk-weighted assets and be fulfilled by Core Tier 1 capital.

Under specified circumstances, commercial banks shall set aside countercyclical capital after meeting the minimum capital requirement and the capital reservation buffer requirement. Countercyclical capital shall be 0-2.5% of risk-weighted assets and be fulfilled by Core Tier 1 capital.

The additional capital of domestic systematically important banks shall be 1% of risk-weighted assets and be fulfilled by Core Tier 1 capital.

As for the capital requirements under the Second Pillar, the CBIRC shall have the power to, in light of the operational risk management level and the occurrence of operational risk events of a single commercial bank, raise the regulatory capital requirements for operational risk.

Liquidity Requirements

Pursuant to Measures for the Liquidity Risk Management of Commercial Banks, liquidity risk supervisory indicators include liquidity coverage ratio (LCR), net stable funding ratio (NSFR), liquidity ratio, liquidity matching ratio, and adequacy ratio of HQLA.

A commercial bank with an asset size of not less than CNY200 billion shall continuously meet the minimum supervisory standards for LCR, NSFR, liquidity ratio and liquidity matching ratio. A commercial bank with an asset size of less than CNY200 billion shall continuously meet the minimum supervisory standards for adequacy ratio of HQLA, liquidity ratio and liquidity matching ratio.

The supervisory indicator of LCR is designed to ensure that a commercial bank has adequate qualifying HQLA which can be monetised to meet the future liquidity needs of, at a minimum, 30 days under the liquidity stress scenarios as prescribed. The minimum supervisory standard of LCR shall not be lower than 100%.

The supervisory indicator of NSFR is designed to ensure that a commercial bank has adequate sources of stable funds to meet the needs of various types of assets and off-balance-sheet risk exposure for stable funds. The minimum supervisory standard of NSFR shall not be lower than 100%.

The minimum supervisory standard of liquidity ratio shall not be lower than 25%. The supervisory indicator of liquidity matching ratio measures the maturity allocation structure of the major assets and liabilities of commercial banks, and is designed to direct commercial banks to rationally allocate long-term stable liabilities and high-liquidity or short-term assets, avoid over-reliance on short-term funds in supporting the development of long-term business, and improve their liquidity risk withstanding capacity. The minimum supervisory standard of liquidity matching ratio shall not be lower than 100%.

The supervisory indicator of adequacy ratio of HQLA is designed to ensure that a commercial bank maintains adequate unencumbered HQLA which can be monetised to meet the future liquidity needs within the coming 30 days in times of stress. The minimum supervisory standard of the adequacy ratio of HQLA shall not be lower than 100%.

Risk Management Rules

Risk management rules on quantity and quality of capital requirements

According to Administrative Measures for the Capital of Commercial Banks (for Trial Implementation), commercial banks shall have a sound risk management framework and a robust internal capital adequacy assessment process, specify the risk governance structure, prudentially assess various risks, capital adequacy levels and capital quality, and develop capital plans and capital adequacy ratio management plans to ensure that their capital is sufficient to resist risks facing them and meet the needs for business development.

The CBRC shall implement supervisory inspection on capital adequacy ratios of commercial banks to ensure that their capital is able to sufficiently cover all risks facing them. Supervisory inspection on capital adequacy ratios includes but is not limited to:

  • evaluating the overall risk management framework of commercial banks;
  • examining commercial banks' recognition of eligible capital instruments and their measurement methods and results regarding all risk-weighted assets and evaluating the reasonableness and accuracy of the measurement results of capital adequacy ratios;
  • checking the internal capital adequacy assessment process of commercial banks and evaluating the corporate governance, capital plans, internal controls and audits of commercial banks; and
  • assessing the credit risk, market risk, operational risk, interest rate risk in the banking book, liquidity risk, reputational risk and strategic risk of commercial banks and checking the stress testing work of commercial banks.

As for the disclosure requirement, capital adequacy ratio information disclosure shall, at a minimum, cover:

  • risk management system: the management objectives, policies, flows and organisational structures for credit risk, market risk, operational risk, liquidity risk and other material risks and the functions of the relevant departments;
  • calculation coverage of capital adequacy ratios;
  • quantity and composition of capital and the capital adequacy ratio at each tier;
  • measurement approaches for credit risk, market risk and operational risk, material changes in the risk measurement system, and changes in the relevant capital requirements;
  • qualitative and quantitative information on credit risk, market risk, operational risk and other material risk exposures and assessments;
  • internal capital adequacy assessment approaches and other relevant factors affecting capital adequacy ratios; and
  • qualitative information on remuneration and related quantitative information.

Risk management rules on liquidity requirements

According to the Measures for the Liquidity Risk Management of Commercial Banks, a commercial bank shall, at the legal entity levels, establish a liquidity risk management system commensurate with the scale, nature, and complexity of its business. The liquidity risk management system shall include the following basic elements:

  • an effective governance structure for liquidity risk management;
  • sound strategies, policies, and procedures for liquidity risk management;
  • effective identification, measurement, monitoring and control of liquidity risk; and
  • complete management information systems.

The CBIRC shall conduct analysis and monitoring of the liquidity risk of commercial banks and the banking system on a regular basis, in terms of the asset-liability maturity mismatch, degree of diversification and stability of funding sources, unencumbered assets, and liquidity risk profile of significant currencies of commercial banks, and the market liquidity, among others. The CBIRC shall take into full consideration the limitations of a single liquidity risk supervisory indicator or monitoring tool in reflecting the liquidity risk of commercial banks, and make comprehensive use of a variety of methods and tools to analyse and monitor liquidity risk. The CBIRC may, in consideration of the development strategies, market positioning, business model, asset and liability structure and risk management capability of a commercial bank, set differentiated monitoring early warning values or early warning intervals for all or part of the monitoring tools, and at the appropriate time, issue risk alerts or require the bank to take relevant measures.

As for the disclosure requirement, the Measures for the Liquidity Risk Management of Commercial Banks requires that a commercial bank shall, according to the applicable provisions, disclose on a regular basis the information on its liquidity risk level and the management status thereof, including but not limited to the following:

  • liquidity risk management governance structure, including, but not limited to, the duties and roles of the board of directors and its specialised committees, the senior management, and the relevant departments;
  • liquidity risk management strategies and policies;
  • main methods for the identification, measurement, monitoring, and control of liquidity risk;
  • main liquidity risk management indicators and a brief analysis thereof;
  • major factors affecting liquidity risk; and
  • information on stress testing.

Additional Requirements Applicable to Systemically Important Banks

Expect for what mentioned above that the additional capital of domestic systematically important banks shall be 1% of risk-weighted assets and be fulfilled by Core Tier 1 capital. China has launched the Additional Supervision Regulations for Systemically Important Banks (for Trial Implementation, effective on 1 December 2021), in which clearly put forward additional regulatory requirements for systemically important banks.

On the basis of meeting minimum capital requirements, capital reservation buffer and countercyclical capital requirements, systemically important banks should also meet certain additional capital requirements, which are met by core Tier 1 capital. Systemically important banks are divided into five groups. Banks in the first to fifth groups are subject to additional capital requirements of 0.25%, 0.5%, 0.75%, 1%, and 1.5%, respectively. If a bank is recognised as both a China's systemically important bank and a global systemically important bank, the additional capital requirements are not superimposed, and the principle of the higher of the two is used to determine.

On the basis of meeting the requirements for leverage ratios, systemically important banks shall additionally meet the requirements for additional leverage ratios. The additional leverage ratio requirement is 50% of the additional capital requirement of systemically important banks, which is met by Tier 1 capital.

The PBOC shall strengthen the monitoring, analysis and risk assessment of systemically important banks on the basis of consolidation, including:

  • collecting and analysing quantitative information such as financial data, capital adequacy, liquidity, large risk exposures, connected transactions, and internal transactions of systemically important banks on the basis of consolidation;
  • collecting qualitative information on corporate governance, internal control, firewall construction, and risk management at the systemically important bank group level; and
  • regularly assessing systemically important bank group-level risks and risk management status, cross-border operations, cross-industry operations, and internal risk cross-infection methods.

The CBIRC implements consolidated supervision and management of systemically important banks in accordance with the law, and implements strengthened supervision requirements.

The Principal Means of Resolving a Failing Bank

According to the Law of Commercial Banks, Where a commercial bank is unable to pay the debts due, it may be adjudicated bankrupt by the people's courts according to law with the consent of the banking regulatory organ of the State Council. In this process, the people's courts shall organise the banking regulatory organ of the State Council and other relevant departments and personnel to form a liquidation group to make liquidation. In the bankruptcy liquidation of a commercial bank, the bank shall, after paying the liquidation expenses, the wages of the employees, and labour insurance fees, pay in priority the principals and interests of individual savings deposits.

The FSB Key Attributes of Effective Resolution Regimes

The Financial Stability Board (FSB) issued a series of documents such as "Reducing the Moral Hazard of Systemically Important Financial Institutions", "Intensity and Effectiveness of Supervision of Systemically Important Financial Institutions", and "Key Attributes of Effective Resolution Regimes".

In respond of this, China has formulated the "Guiding Opinions on Improving Supervision Regulation of Systemically Important Financial Institutions".

The "Guiding Opinions on Improving Supervision Regulation of Systemically Important Financial Institutions" mainly cover three aspects: First, scientific evaluation, and reasonable identification of financial institutions that have a systemic impact on the stability of the financial system. The second is to strengthen supervision and reduce the possibility of major risks in systemically important financial institutions. The third is to establish a special resolution mechanism to ensure that systemically important financial institutions can be safely, quickly and effectively handled when major risks occur, and to ensure that their key businesses and services are not interrupted.

Insolvency Preference Rules Applicable to Deposits

As mentioned above, the insolvency preference rules applicable to deposits is stipulated in the Law of Commercial Banks, which is that in the bankruptcy liquidation of a commercial bank, the bank shall, after paying the liquidation expenses, the wages of the employees, and labour insurance fees, pay in priority the principals and interests of individual savings deposits.

Regulating Internet Financial Services

The “Interim Measures for the Administration of Internet Loans of Commercial Banks”, the “Notice by the General Office of the CBIRC of Further Regulating the Internet Loan Business of Commercial Banks” and the ”Notice of Further Regulating the Supervision and Administration of Online Consumer Loans for College Students” issued recently by the issued recently by the Chinese banking regulatory authorities has a disruptive impact on the field of Internet finance.

The Chinese banking regulatory authorities has always adhered to the following principles for the rectification of the online platform enterprises’ financial business:

  • to insist on fully incorporating financial activities into supervision in accordance with the law, and all financial businesses must be licensed to eliminate regulatory arbitrage;
  • to adhere to fair supervision and strict supervision. Treat similar businesses and entities equally, effectively prevent financial risks, and maintain financial stability; and
  • it is equally important to insist on development and standardisation.

Focus will be put on supporting network platform enterprises to uphold innovation and standardise development under the premise of prudential supervision, and at the same time, to resolutely break monopoly and maintain

The main purpose of these policies is to raise the threshold for financial institutions and internet platform companies to carry out joint loan business cooperation, restrict financial institutions from conducting fixed deposit and time-demand deposit business through third-party internet platforms, and essentially cancel the sales of wealth management products by internet platform companies as agents. These policies will completely change the business model of internet platform companies relying on the advantages of technology, high leverage, high returns.

Resolving the Risks of Shadow Banking

Banking financial institutions have implemented the Guiding Opinions on Regulating the Asset Management Business of Financial Institutions, gradually cleaned up and reduced non-compliant off-balance sheet financial management investment on non-standard asset, on-balance sheet specific purpose carrier investment, inter-bank financial management and other business scales, and strictly control bank-trust channel business. The corresponding risk classification, capital appropriation, and provisioning requirements have been strictly applied to resolve shadow banking risks in an orderly manner.

Improving the Protection of Financial Consumer Rights

In September 2020, the PBOC issued the Implementation Measures for Protecting Financial Consumers' Rights and Interests. In July 2021, the CBIRC issued the Measures for the Supervision and Evaluation of the Protection of Consumer Rights and Interests of Banking Insurance Institutions. The above-mentioned rules and regulations require financial institutions to establish rules and regulations on the protection of financial consumers' rights and interests, clarify relevant codes of conduct, establish the internal control over personal financial information protection, financial product and service information disclosure mechanism, financial consumer risk level assessment, complaint acceptance and handling process, and popularisation of financial knowledge and the education of financial consumers.

At the same time, with the PRC Personal Information Protection Law comes into effect, the responsibilities of financial institutions in the protection of personal financial information will gradually become stricter. When collecting personal financial information, financial institutions shall follow the principles of lawfulness, reasonableness and necessity, shall strictly fulfil the obligation of information confidentiality, and properly comply with laws, regulations and the scope authorised by users to process, custody, store and use personal financial information.

Strengthening the Compliance Risk Management of Digital Financial Services

Financial regulatory agencies will strengthen the supervision of financial technology and formulate higher compliance requirements for commercial banks to carry out digital financial services. Many commercial banks have previously experienced risk incidents and suffered heavy penalties due to loopholes in their compliance and internal control mechanisms. For this reason, commercial banks should strengthen their compliance risk management.

Developing Green Finance

Banking financial institutions will establish and improve environmental and social risk management systems, incorporate environmental, social, and governance (ESG) requirements into the entire process of credit granting, and improve professional green finance service capabilities and risk prevention and control capabilities. Banking financial institutions shall also actively develop energy efficiency credit, green bonds and green credit asset securitisation, steadily carry out environmental rights and ecological compensation mortgage financing, establish green development funds in accordance with laws and regulations, and explore carbon finance, climate bonds, blue bonds, environmental pollution liability insurance, and climate Innovative green financial products to support the development of green, low-carbon and circular economy.

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Jingtian & Gongcheng is one of the first private and independent partnership law firms in China. The firm boast expertise in capital markets, mergers and acquisitions, cross-border investments, dispute resolution, banking and finance, asset management, investment funds, private equity and venture capital, real estate and construction, intellectual property, employment and labour, cybersecurity and data protection, and a range of industry sectors including technology, media and telecommunications and healthcare. Headquartered in Beijing, Jingtian & Gongcheng advises its clients through offices located in China’s key economic centres, including Shanghai, Shenzhen, Chengdu, Tianjin, Nanjing, Hangzhou, Guangzhou, Sanya and Hong Kong, enabling close collaboration with clients. The firm maintains more than 200 partners and approximately 500 lawyers and legal assistants. Many of the firm's lawyers graduated from top-tier Chinese and international law schools and maintain solid technical capabilities and commercial know-how.

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