Chinese Central Bank Overhauls Commercial Banking Law

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The People’s Bank of China (PBOC) has unveiled a broad raft of proposed changes to China’s commercial banking law.

On 16 October PBOC issued the draft version of the amended “People’s Republic of China Commercial Bank Law” (中华人民共和国商业银行法(修改建议稿)) for the solicitation of opinions from the public.

The draft marks the third overhaul of the law since its implementation in 1995, and the release of two amended versions in 2003 and 2015.

PBOC said that over the past decade China’s banking sector has seen surging growth, with participating institutions expanding sharply in both number and scale. According to PBOC a large number of provisions in the 2015 redaction of the law are no longer applicable, and “urgently await comprehensive amendment.”

The new draft outlines differentiated regulation for Chinese commercial banks based on the size of their balance sheets, risk levels and systemic importance, as well as specific requirements for risk indices, corporate governance, information disclosures, frequency of on-site inspections and other regulatory measures

The draft version adds a new section on corporate governance for commercial banks, as well as new shareholder duties and prohibited conduct for shareholders, while stressing the “core role” of the board of directors and independent directors.

PBOC has also added new requirements concerning the protection of consumer rights, specifying for example that banks should provide compensation to customers for losses arising from the provision of products and services that do not match their risk tolerance levels.

Commercial banks in China will not be permitted to engage in “excessive lending,” “bundled sales” of products and services, or the “mandatory accompanying sale or addition within contracts of unreasonable transaction conditions to products and services.”

Commercial banks are prohibited from “collecting unrelated personal information or collecting personal information through inappropriate methods,” or “tampering with, selling or inappropriately using personal information.”

The draft version further stipulates that where the capital adequacy ratio of commercial banks sees large-scale declines which impact the safety of deposits, banking regulators and deposit insurance authorities may adopt various advance rectification measures.

Following a wave of regional bank failures and bank runs since early 2019, the amended version of the law further expands take over arrangements, adds new takeover conditions and take over organisational duties, and provides more detail concerning bankruptcy and repayment procedures.

The draft specifies that under any of the following situations China’s State Council may opt to take over a bank due to potential inability to continue operations or severe impact upon the interests of depositors:

  1. Continued deterioration of asset quality;
  2. Severely insufficient liquidity;
  3. Major breaches of the law or regulations;
  4. Major defects in management;
  5. Severe insufficiency of capital, and inability to restore capital following the adoption of corrective measures or reorganisation;
  6. Other conditions that could impact the ongoing operation of commercial banks.

Following concerns over the severe impact of banking malfeasance upon the general economy as well as the comparatively light nature of existing sanctions for offences, the draft version heightens the severity of penalty measures, raising the ceiling for fines of various infractions from five times to ten times the value of illegal proceeds.

The draft also stipulates that Chinese regional banks, such as municipal commercial banks, rural commercial banks and county banks, are not permitted to engage in cross-regional operations without prior approval.

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