“Bad Banks” Become “Good” Via Corporate Governance Reforms, CCP Needs to Play Greater Role: CBIRC

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The China Banking and Insurance Regulatory Commission (CBIRC) has pointed to the need for further corporate governance reforms and supervision from the Chinese Communist Party (CCP) to shore up the health of the country’s nationwide joint-stock commercial banks.

In an article published by CBIRC on 28 August CBIRC deputy chair Zhou Liang (周亮) pointed to the success of corporate governance reforms for certain joint-stock banks in China.

“A small number of banks have already resolved long-standing problems with governance,” wrote Zhou. “Hengfeng Bank (恒丰银行) has already changed from a ‘bad bank’ to a ‘good bank,’ becoming a successful example of reform and restructuring.”

Zhou highlighted the need for nationwide joint-stock banks in general to make further improvements to their corporate governance systems.

“Xi Jinping has made key statements on multiple occasions about improving the corporate governance of financial institutions, providing joint-stock banks with basic guidance for their own improvements to corporate governance,” wrote Zhou.

“Given that financial institutions are distinguished by strong externalities, high leverage ratios and information asymmetries, healthy corporate governance is especially critical to the long-term stable operation of the financial system.”

As of the end of June 2020 China’s 12 nation-wide joint-stock banks had total assets of 55.6 trillion yuan, accounting for 18.7% of the Chinese banking sector total.

Zhou’s essay arrives following multiple calls from senior Chinese financial regulators for improvements to corporate governance in the banking sector.

In an es­say pub­lished by Eco­nomic Daily on 3 July Guo Shuqing (郭树清), party sec­re­tary of the cen­tral bank and head of the China Bank­ing and In­sur­ance Reg­u­la­tory Com­mis­sion (CBIRC) high­lighted the need for strong cor­po­rate gov­er­nance to en­sure the ef­fec­tive func­tion­ing of fi­nan­cial in­sti­tu­tions. 

Zhou Xue­dong (周学东), chair of the Chinese central bank of­fice wrote an essay in August pointing to poor corporate governance as a key factor behind the failings of many of China’s beleaguered regional banks.

Zhou Liang outlined a number of prevailing problems with corporate governance amongst Chinese joint-stock banks including:

  1. The urgent need for strengthening of party leadership and party establishment at joint-stock banks. “Joint-stock banks suffer from weakened party leadership to varying degrees, and party development is lacking.”
  2. Need for standardisation of equity relationships and shareholder conduct. “Problems include proxy holding by shareholders and hidden shareholders.”
  3. Weakening of checks on authority and internal control mechanisms. “At some joint-stock banks limits on authority are confused and professional duties are unclear.”
  4. Strategic plans and risk control have deviated. “Some joint-stock banks are single-mindedly pursuing scale and speed [of growth], and overlooking quality and benefits.”
  5. Lack of sufficiently scientific incentives, restraints and performance mechanisms. “The board remuneration schemes of some joint-stock banks are irrational, and performance assessments are excessive focused on short-term gain and the pursuit of profits, with insufficient consideration of public interests, market order and protection of consumers.”

With regard to improvements to corporate governance at joint-stock banks, Zhou called for:

  1. Comprehensive strengthening of party leadership and party development.
  2. Strengthening of boards of directors.
  3. Effective use of supervisory boards.
  4. Strengthening of standardisation of the professional conduct of senior executives.
  5. Improvements to incentive and restraint mechanisms.
  6. Strengthening of external supervisory and market restraints.
  7. Strengthening of regulatory capacity.
  8. Reference to excellent international experience.

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