TA3890 Final

Banking Laws and Regulations
ASIAN DEVELOPMENT BANK FUNDED TECHNICAL ASSISTANCE: PRC 3890
Final Report
December 2003
prepared by
INTERNATIONAL LAW INSITUTE

1055 Thomas Jefferson Street, NW Washington, D.C. 20007 www.ili.org
FINAL REPORT
PRC 3890 BANKING LAWS AND REGULATIONS
written by
James Barth Zhongfei Zhou Patrick Macrory Richard Self Jingxia Shi Guorong Zhang George A. Walker Liguo Cui International Team Leader Domestic Team Leader International WTO Expert International WTO Expert Domestic WTO Expert Domestic WTO Expert International Financial Conglomerates and Insolvency Expert Domestic Financial Conglomerates, Insolvency and Credit Information Expert International Central Bank Expert International Anti-Money Laundering Expert Domestic Anti-Money Laundering Expert International Credit Info Expert International Credit Info Expert Auburn University & Milken Institute Shanghai University of Finance and Economics, Law School International Law Institute Nathan Associates University of International Business & Economics, Law School Beijing Zhongfu Law Firm Queen Mary, University of London Guantao Law Firm
Rosa Lastra Herbert Morais Guang Yang Robert Litan Leonard Chanin
Queen Mary, University of London Independent expert Guantao Law Firm Brookings Institute Morrison & Forrester LLP
with contributions from

Douglas Arner C A E Goodhart Fred Cate Wei Wang Changyuan Lin Li Zhang Marshall Mays International Banking Expert International Central Bank Expert Credit Info Expert Domestic WTO Expert Domestic Financial Conglomerates Expert Translator Project Director University of Hong Kong London School of Economics Indiana University Queen Mary, University of London Chinese Academy of Social Sciences Queen Mary, University of London International Law Institute
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Table of Contents
I. OVERVIEW OF THE REPORT...................................................................................................... 1
A.
II.
Executive Summary ............................................................................................................ 1

LEGAL FRAMEWORK ................................................................................................................. 13
A. B. C. D. 1. 2. 3. 4. 5. 6. 7. 8. 9.
Goals of Bank Regulation and Supervision ...................................................................... 13 The PRCs Financial System ............................................................................................ 14 Issues in Regulating and Supervising Banks .................................................................... 17 Inconsistencies in the Existing Legal Framework ............................................................ 20 City Cooperative Banks Form ................................................................................... 20 City Cooperative Banks Preparative Period .............................................................. 20 Post Qualifications for Senior Management of Financial Institutions.......................... 21 Business Scope Approval ............................................................................................. 21 Consolidated Accounting Treatment ............................................................................ 23 Dividend Policy Restrictions ........................................................................................ 23 Loan Loss Provisioning ................................................................................................ 23 Provisioning Consistent Treatment............................................................................ 25 Separation of Responsibility ......................................................................................... 25
10. Shareholder Powers ...................................................................................................... 25 11. Board of Directors Special Committees .................................................................... 26 12. Financial Institutions in Difficulty................................................................................ 26 13. Fines.............................................................................................................................. 28 14. Branch Closure Rules ................................................................................................... 28 E. 1. 2. 3. 4. 5. 6. Recommendations for the Design of a Central Bank Law ............................................... 28 Summary of Recommendations.................................................................................... 29 Objectives of the PBC................................................................................................... 29 Functions of the PBC, with an Emphasis on Monetary Policy..................................... 31 Independence of the PBC.............................................................................................. 32 Organization of the PBC............................................................................................... 33 Financial Stability and Lender of Last Resort .............................................................. 34
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7. F. 1. 2. 3. 4. 5. 6. 7. 8. 9.
Accountability and Transparency ................................................................................. 36 Specific Issues and Recommendations ............................................................................. 37 Regulatory and Supervisory Structure, Scope, Independence and Accountability ...... 38 Entry into Banking........................................................................................................ 43 Ownership Structure ..................................................................................................... 46 Scope of Activities........................................................................................................ 47 Capital Requirements.................................................................................................... 49 External Auditing Requirements and Examinations..................................................... 52 Liquidity and Diversification Requirements................................................................. 53 Provisioning Requirements........................................................................................... 54 Accounting and Information Disclosure Requirements................................................ 58
10. Discipline and Problem Institutions Insolvency ........................................................ 59 11. Risk Concentration........................................................................................................ 61 12. Deposit Insurance Schemes .......................................................................................... 65 G. Epilogue on new legislation.............................................................................................. 70
III. WTO COMMITMENTS AND COMPLIANCE ISSUES ............................................................ 72
A. 1. 2. 3. 4. 5. B. 1. 2. 3. C. D. E. F. G.
The Commitments and Compliance Issues....................................................................... 72 Introduction................................................................................................................... 72 WTO Commitments...................................................................................................... 72 WTO Phase-out Period ................................................................................................. 74 Approach to the Task .................................................................................................... 74 The Exception for prudential measures & prospects for interpretation under GATS .. 75 The PRCs Bank Capital Requirements and WTO Consistency ...................................... 77 Foreign subsidiaries ...................................................................................................... 77 Foreign Branches .......................................................................................................... 79 The Prudential Exception and the PRCs Branch Capital Requirements ..................... 82 Qualifications of Applicants Establishing Banking Subsidiaries within the PRC............ 84 Asset-Pledge Requirements on Foreign Bank Branches .................................................. 86 Ratio of Fixed Assets to Equity in Subsidiaries ............................................................... 88 The Ratio of RMB Assets in Capital to RMB Assets in Risk Assets ............................... 90 The Ratio of Foreign-Exchange Deposits to Total Foreign-Exchange Assets ................. 91
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H. I. J. K. L.
Conditions for Establishing Branches............................................................................... 93 Application Period ............................................................................................................ 94 Conditions to Operate in Local Currency ......................................................................... 95 Form of Establishment...................................................................................................... 96 Single Law and Regulation for Foreign and PRC Banks ................................................. 98
M. Other Obligations in the PRCs WTO Banking Commitments ........................................ 99 1. 2. N. O. P. Auto Financing.............................................................................................................. 99 Financial Leasing .......................................................................................................... 99 Countervailing considerations in assessing national treatment issues.............................. 99 Conclusion ...................................................................................................................... 101 Epilogue on new legislation............................................................................................ 102
IV. CREDIT INFORMATION BUREAU REGULATION.............................................................. 103
A. 1. 2. 3. B. 1. 2. 3. 4. 5. C.
V.
Credit Information Bureau Regulations.......................................................................... 103 Introduction ................................................................................................................ 103 General Comments ..................................................................................................... 103 Specific Comments..................................................................................................... 107 Survey of Treatment of Credit Bureaus in Other Countries ........................................... 111 Introduction ................................................................................................................ 111 Public Credit Registers............................................................................................... 112 Private Credit Bureaus................................................................................................ 114 Privacy Provisions...................................................................................................... 116 Status of Credit Information Rules and Practices in the PRC.................................... 117 Conclusions and Recommendations ............................................................................... 118
ANTI-MONEY LAUNDERING GENERAL ANALYSIS AND RECOMMENDATIONS. 122
A. B. C. 1. 2. 3.
Introduction..................................................................................................................... 122 Background to the Money Laundering Problem............................................................. 122 Current State of the Legal and Institutional Framework ................................................ 123 International Legal Commitments .............................................................................. 123 A National Law to Criminalize Money Laundering ................................................... 124 The PBCs Regulation and Administrative Measures ................................................ 127
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4. D. 1. 2.
Institutional Arrangements.......................................................................................... 131 Summary of Findings and Overall Assessment .............................................................. 133 Promulgation of a new Basic Law Against Money Laundering................................. 133 Interim Measures ........................................................................................................ 138
VI. ANTI-MONEY LAUNDERING SUPPLEMENTARY GUIDE ON LAW DRAFTING .... 140
A. B. C. 1. 2. 3. D. E. F. 1. 2. 3. 4. 5.
Introduction..................................................................................................................... 140 Need to amend Article 191 in the Criminal Law............................................................ 140 Specific comparison of anti-money laundering legislation ............................................ 140 Anti-money laundering laws and institutions in the United States............................. 140 Anti-money laundering legislation and institutions in Thailand................................. 145 Anti-money laundering legislation and institutions in Philippines............................. 148 Recommendations on amendment of existing laws........................................................ 150 Basic structure of an anti-money laundering law ........................................................... 154 Design of an anti-money laundering organization.......................................................... 156 Establishing an Anti-Money Laundering Working Committee .............................. 157 Establishing an Anti-money Laundering Bureau .................................................... 157 Responsibilities and authorities of an Anti-Money Laundering Bureau: ................... 158 Organization of a financial intelligence unit (FIU)..................................................... 159 Professional prerequisites for the staff of an FIU ....................................................... 159
VII. FINANCIAL CONGLOMERATES............................................................................................. 160
A. B. C. D. E. F. G. 1. 2. H.
Introduction..................................................................................................................... 160 Summary Conclusions and Recommendations............................................................... 162 PRC Law and Practice .................................................................................................... 165 Conglomerate Advantages and Disadvantages............................................................... 166 International Regulatory Response ................................................................................. 169 Bank Holding and Financial Holding Company Rules................................................... 171 Regulatory and Supervisory Revision ............................................................................ 174 Regulatory Revision.................................................................................................... 174 Supervisory Adjustment.............................................................................................. 177 Conglomerate Laws ........................................................................................................ 181
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I. 1. 2. 3. J. 1. 2. 3.
Institutional Relations ..................................................................................................... 182 Memorandum of Understanding ................................................................................. 183 Administrative law or Regulation............................................................................... 184 Single Regulator.......................................................................................................... 186 Conglomerate Comment ................................................................................................. 188 Separate Sectors .......................................................................................................... 189 Separate Agencies....................................................................................................... 191 Separate Laws ............................................................................................................. 193
VIII. BANK INSOLVENCIES ............................................................................................................... 195
A. B. C. D. E. F. 1. 2. 3. 4. 5. G. 1. 2. 3. 4. 5. H.
Introduction..................................................................................................................... 195 Summary Conclusions and Recommendations............................................................... 196 PRC Law and Practice .................................................................................................... 201 Insolvency and Bank Insolvency Procedures ................................................................. 205 Court and Administrative Based Systems....................................................................... 207 Policy Options................................................................................................................. 210 Conservation ............................................................................................................... 211 Administration ............................................................................................................ 213 Restructuring or Rehabilitation................................................................................... 215 Liquidation.................................................................................................................. 216 Bankruptcy.................................................................................................................. 218 Support or Rescue Options ............................................................................................. 219 Market Support ........................................................................................................... 220 Restructuring or Rehabilitation................................................................................... 220 Secured Lending and Capital Injections ..................................................................... 221 Asset and Liability Transfers ...................................................................................... 222 Share Transfers ........................................................................................................... 222 Supporting Statutory Provisions .................................................................................... 222
IX. CONCLUSION............................................................................................................................... 224
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APPENDICES
A. Legal Framework tables of international comparisons ................................................................... 1
1. Table 1 Chinas Financial System, 2002 2. Table 2 Core Principles Compliance 3. Table 3 Regulatory & Supervisory Structure, Scope, Independence & Accountability 4. Table 4 Entry Into Banking 5. Table 5 Ownership Structure 6. Table 6 Scope of Activities 7. Table 7 Capital Requirements 8. Table 8 External Auditing Requirements & Examinations 9. Table 9 Liquidity & Diversification Requirements 10. Table 10 Provisioning Requirements 11. Table 11 Accounting & Information Disclosure Requirements 12. Table 12 Discipline and Problem Institutions Insolvency 13. Table 13 Deposit Insurance Schemes 14. Table 14 Risk Concentrations
1 2 3 8 11 16 24 28 30 34 38 42 49 53
B. WTO Commitments tables of international comparisons ............................................................. 54
1. 2. 3. 4. 5.
Table 1 Capital Requirements in Various Countries 54 Table 2 Measures that appear to treat foreign financial institutions less favorably 56 Table 3 Endowment Capital Requirements for Branches of Foreign Banking Organizations59 Table 4 Asset Pledge Requirements for Branches of Foreign Banking Organizations 60 Table 5 Industrial-Firm Investment in Banks 60
C. Credit Information Bureaus table of international comparisons ................................................. 62
1Must Register with the Government 2Restrictions on Entry into Market 3Legal Restrictions that Discourage Private Credit Bureaus from Forming 4Bureau Coverage of Individuals or Firms 5Ownership of Credit Bureaus 6Type of Information Shared with Users
D. Anti-Money Laundering table of international comparisons........................................................ 63
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(international standards, key elements of law, international country comparisons)

E. Anti-Money Laundering detailed comments on three Rules of March 2003 ............................... 73 F. Financial Conglomerates supporting discussion and comparisons............................................... 93
1. 2. 3. 4. 5. 6. 7. 8.
Financial Laws in China Joint Forum on Financial Conglomerates International Comparison of Financial Conglomerate Laws International Comparison of Inter-Agency Cooperation Organizational Structure of the Joint Committee EU Financial Conglomerates Advantages and Disadvantages of Single Regulators in Institutional Reform UK Financial Services and Markets
93 103 122 173 193 194 201 202
G. Bank Insolvency supporting discussion and comparisons .......................................................... 207
1. Insolvency Laws in the PRC 2. Principles for Effective Insolvency and Creditor Rights Systems World Bank
207 217
H. Bank Insolvency tables of international comparisons ................................................................. 227
1. To what extent is the banking supervisor responsible for the insolvency procedure, to what extent is the procedure managed by a bankruptcy court 227 2. What mechanisms are there for inter-agency and court coordination 227 3. To what extent is bank insolvency governed by a special law or the general bankruptcy or insolvency law 228 4. Explain the extent to which any pre-insolvency supervisory intervention is available 229 5. Explain the extent to which any reconstruction or reorganization measures exist 229 6. Explain the extent to which any financial assistance is available especially through capital injections into unsound financial institutions 232
I. Summary of ten reference markets treatment of central bank law............................................... 234
I. II. III. IV. V. VI. VII. VIII. IX
Objectives Functions Monetary Operations Independence Organization Lender of last resort Accountability and Transparency Relations with other institutions Supervisory Responsibilities
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235 237 245 249 266 273 276 283 285

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X.
Finance and accounting
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Glossary of abbreviations
ABC ADB AML/CFT APG BOC CCB CBRC CFRC CIRC CSRC DFI EDIS FATF FATF 40 FATF 8 FDIC FED FFI FIU IAS IAIS ICBC ILI IMF IOSCO LOLR MOF MOU MPS NPC NPL PBC PCA PCR PRC PSB RMB SAFE SOB SOE SPC SPP WTO Agricultural Bank of China Asian Development Bank Anti-Money Laundering & Combating the Financing of Terrorism Asia Pacific Group on Money Laundering Bank of China China Construction Bank China Banking Regulatory Commission China Financial Regulatory Commission China Insurance Regulatory Commission China Securities Regulatory Commission domestic financial institution explicit deposit insurance scheme Financial Action Task Force the FATF Forty Recommendations the FATF Eight Special Recommendations on Terrorist Financing Federal Deposit Insurance Corporation Federal Reserve Bank of the United States foreign financial institution financial intelligence unit International Accounting Standards International Association of Insurance Supervisors Industrial and Commercial Bank of China International Law Institute International Monetary Fund International Organisation of Securities Commissions lender of last resort Ministry of Finance memorandum of understanding Ministry of Public Security National Peoples Congress, the highest law-making body non-performing loan Peoples Bank of China prompt corrective action public credit register Peoples Republic of China Public Security Bureau Renminbi, the currency of the PRC State Administration for Foreign Exchange State-Owned Bank State-Owned Enterprise Supreme Peoples Court Supreme Peoples Procuratorate World Trade Organization
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FINAL REPORT, SECTION I EXECUTIVE SUMMARY
I. OVERVIEW OF THE REPORT A. Executive Summary The Peoples Republic of China has been creating a comprehensive legal framework for its society since the early 1990s. Work in the financial sector has been particularly intense and this project (TA 3890: PRC - Banking Laws and Regulations) has been directed at certain critical aspects of that work. This final report documents some of the PRCs progress in these aspects and makes specific recommendations on the introduction of new financial laws and on potential consolidation and refinement to the countrys financial legal framework, with particular regard to its commitments to the WTO in this sector. The gradual introduction of market forces, a process begun over a decade ago in the PRC, has been accelerating, especially under the guidance of new the 4th-generation leaders. New opportunities and productivity growth unleashed by these forces also have brought in certain social costs. The rapid pace of change is creating new challenges to financial stability, as new channels of finance and profit are created, often ahead of policies for managing them. Yet, the biggest challenge facing the system remains the restructuring of the state-owned sector, especially the big four banks, which have served as social safety valves for the pressures created by this change until now. The new orders emerging from the NPC meeting in October 2003 underline the intention on a rapid transition toward market-priced assets and liabilities for these giants. The implications for the financial system are profound and, it will be argued throughout this report, emphasize the importance of adopting the kinds of public checks and balances recommended herein. How this transition will be implemented is not entirely clear. It is likely to create new business for merger-and-acquisition firms, as well as for asset-restructuring and corporategovernance experts. On the other hand, there can be no doubt that this is an unprecedented social and financial experiment. Its success will depend upon not only a new level of political will but also new levels of disclosure and public accountability all part of the new leaderships stated plans. Improvements within the regulatory framework, beginning with the revision (promulgated 27 December 2003) to the Commercial Banking Law, should include the replacement of various
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stand-alone rules with a comprehensive policy on the licensing process, particularly on branch capital and related prudential requirements, and on credit assessment. This will improve the consistency and clarity of rules on market entry and operation for banks, stimulating innovation within prudent limits. Establishing requirements for external auditors and up-dating the inspection criteria will improve regulatory measurement, while encouraging a gradual adoption of international accounting standards will help strengthen the balance sheets and operations of an emerging private banking sector. Clear guidelines on asset diversification and permission for a gradual expansion of business scope for banks will also support risk management. Providing for clear steps of prompt corrective action, with the help of better measurement policies, will reduce the cost to system users of remedies, when occasional mistakes by bank management are inevitably made. A number of the project teams recommendations were taken into the three banking laws published on 27 December 2003, improving the quality of supervision, information sharing and system adaptability. These include increased emphasis on professional standards in bank
licensing and operations, improved transparency in the licensing process, more comprehensive and responsive supervision of banks, and scope for future expansion of business lines into nonbank financial services. In addition, the central banks LOLR function is now more clearly defined and an inter-agency coordination and information-sharing mechanism is being formalized The chart in figure 1, on page 6 below, summarizes the projects recommendations into eleven significant areas within the legal framework and proposes how these recommendations could be implemented within four specific laws and related regulation. The chart in figure 2 goes into more detail, comparing on the left-hand side the 1995 central bank law with the project teams proposals and how they were implemented in the revised PBC law, promulgated and implemented on 27 December 2003. The right-hand side of the same chart compares the 1995 Commercial Banking Law with proposed changes and their implementation in the revised Commercial Banking Law and the new Law on Banking Supervision, both promulgated on 27 December 2003, for implementation on 1 February 2004.As in the creation and invigoration of other industries, such as automobiles, machine tools and electronics, a partnership with foreign investors could prove to be the other critical element for success. The PRCs commitments under its December 2001 WTO accession agreement contemplate just such a partnership. In spite of some disappointments with global progress in the current Doha round, the PRCs own progress
in meeting its commitments will provide a clear signal of willing partnership to foreign capital and skills. This will accelerate domestic capacity building and contribute significantly to poverty relief as new, higher-quality credit is created and individuals find new channels for their savings. The PRC has made excellent progress in meeting its schedule of commitments with the WTO and, with the exception of three permitted reservations, looks set to meet them by the December 2006 deadline. The areas where a clear message to foreign partners could be improved deal with legacy systems of prudential control that are likely to be permitted under WTO but may limit the benefits of foreign investment in the financial sector. These center on capital
requirements and the waiting periods for branch applications by foreign financial institutions. Practice, as opposed to promulgated rules, in these areas is moving quickly toward WTO standards, as it is in the area of foreign-ownership. Clarifying this practice into revised regulation will make it easier to measure adherence to policy and will encourage the kind of investment that this policy seeks. This increase in the range of choices is part of the market mechanism that will, in turn, create more change. In this environment, the old-style guarantees of financial stability can not keep pace with this change. Close coordination among regulators, through the proposed Joint Financial Stability Committee, will prove a key to the PRCs new-style, adaptive financial stability. As will clearly communicated and judicious use of risk-mitigation instruments such as an LOLR facility and compulsory deposit insurance, with explicit individual ceilings. A new Law on Bank Restructuring and Liquidation would envisage a clear division of labor among the PBC, the CBRC and the courts in resolving problems at troubled banks and, if required, closing them in an orderly fashion. This would be coordinated through a new Joint Financial Stability Committee, constituted by representatives from the four financial agencies, the MOF and the State Council. In cases of troubled banks, the CBRC would take the role of lead regulator in resolving the institutions difficulties and, if necessary, arranging with the PBC for LOLR facilities. This approach would allow the necessary speed to minimize the social cost of corrective actions, while allowing the courts to provide proper review of agency action to ensure legality and fairness. With the proliferation of new financial services in the PRC, so too are new complex financial groups emerging, both on shore and off shore. To coordinate the regulation of these
emerging multi-sector firms would be the main task of the new JFSC mentioned above, operating under the lead-regulator principle. The PBC has been advised to form a new Financial Stability Department with specific divisions to coordinate liquidity support, restructuring, insolvency and overall financial stability. This approach would support the continued capacity building within the three single-sector regulators, while providing a link between the PBCs primary role in monetary policy and its role in financial stability. The creation of a new Monetary Policy Committee will, simultaneously, support the PBCs independence in decisionmaking in its area of primary responsibility. These new committees and divisions, and how they relate to the PBCs other established and potential new roles, are depicted below in figure 3. Another aspect of the new choices for individuals is the extension of credit to them and their small businesses. The new regulation on private credit-information bureaus is an important step in that direction, but a home for them must be found. A suitable regulator will be able to foster development of this service area, manage the competition to balance service levels against cost, and cope with evolving default patterns in this new borrowing sector. The Korean market provides some useful, current lessons. Such a single regulator would oversee revision to the new regulation that would allow public credit registries to be formed, for improved credit supervision, but to keep them from limiting the growth of a private credit-bureau sector and to facilitate a relaxation of the bank secrecy law that currently hinders their growth. An alternative to a single regulator is to have one regulator, who can concentrate on the bureaus themselves, while allowing the CBRC or a consumer-credit regulator to deal with risk-management aspects and the courts to provide individuals recourse to protect their privacy rights. This is an important question that is beyond the scope of this study but one that needs an answer within the next year or two. A less-savory aspect of the growing range of choices is the growth in opportunities for financial crimes, including money laundering. This, too, is a sector where market innovation is quickly rewarded and where regulators must collaborate closely and adapt quickly. While much attention has been focused on the banking channel, such illegitimate uses have already been perpetrated in the securities and insurance channels and through non-bank channels. Increased international cooperation and mutual assistance initiatives are just as important as domestic financial intelligence. A central FIU can provide the backbone for action but a fully articulated
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skeleton of cooperation must take shape soon. This study proposes a comprehensive law on antimoney laundering be put forward as soon as practicable. Since the national policy choice is to embrace change as opportunity, the task of channeling it constructively now rests upon the regulators. By following through on present initiatives and drawing on this reports recommendations and international comparisons, the PRC financial regulators can be positioned to adapt to this change, with the PBCs support for financial stability collaboration. This report merely sets out the blueprint. The adjustments and innovations that the PBC anticipate over the next year, as indicated below in the diagram of proposed changes and the chart of coverage, would, if implemented, go a long way toward stable management of this change. Figures 1 to 3 follow, below.
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CHART OF ACTIVITY COVERED WITHIN THE LEGAL FRAMEWORK

(figure 1)
PROPOSED COVERAGE BY LAW

Activity Proposed PBC Law Proposed Commercial Banking Law Proposed Financial Groups Law Proposed Financial Insolvency Law Other
Licensing Supervision Crisis Management Financial Stability Enforcement Review of actions Monetary Policy Credit Information bureaus Non-bank credit Anti-money laundering WTO commitments
Authorizes JFSC + Monitoring Coordination; LOLR operations Secondary focus JFSC
Bank entry & exit Banks (rules & inspection) Links to Financial Insolvency Law Banks CBRCs responsibilities Review refusal of application
Coordination (esp. exit) Authorize JFSC + Coordination Coordination of agencies Coordination of agencies Coordination of agencies Coordination Implement, enforce & collect data Support principles
Banks (exit) MOU as an alternative to authorization Primarily banks; Coordinate other FIs Stipulates agency actions Defines courts role, as balancer Align practice to meet commitments CIB Regulation Leasing & credit card regulations AML Law to control + Set up FIU Courts to support Primarily by Court system
Primary focus Data collection Data collection Authorize AML unit
Enables bank data collection Credit cooperatives monitored Implement, enforce & collect data Align practice to meet commitments
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OLD, PROPOSED AND NEW PRC BANKING LAWS

(figure 2)
1995 PBC Law

Objectives: Monetary stability and economic growth Independence: PBC operates under the leadership of the State Council
PBC Law Proposals

Monetary stability, economic growth and financial stability
New PBC Law

Monetary stability and economic growth
1995 Commercial Banking Law

City and rural cooperative banks are joint stock limited banks Article 8 (interests of the State and society), article 34 (loan issuance in line with the need of economy and social development) Prohibition from allocating dividends to shareholders in the case of capital or provision inadequacy (1998 PBC Rule) CBRC organization: -
Banking Law Proposals

Cooperative banks should not be jointstock limited banks
New Commercial Banking Law

Amended to be city or rural commercial banks
Law on Banking Supervision
A provision declaring that the PBC is independent from the State Council
PBC operates under the leadership of the State Council
Abolish
Remains unchanged
Monetary policy committee authority: An advisory committee
Independent and awarded the power of making monetary policy
An advisory committee
A law at the level of the NPC provides for such a prohibition
Article 37
PBC organization: A single committee
Governing board and monetary policy committee
A single committee
A new legal framework for CBRC should include: general duties, responsibilities and functions, regulatory
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General duties, responsibilities and functions, regulatory objectives, organizational
1995 PBC Law
PBC Law Proposals
New PBC Law

objectives, organizational arrangements, appointment and salaries, protection from liability

arrangements,
(1) A pluralistic appointment procedure, including membership based on region, sector and expertise; Provisions on appointment and dismissal: General provisions (2) Provisions on qualifications, such as not being a shareholder of a bank or a member of the legislature; (3) Term of office; (4) A list of grounds and procedures for dismissal. Supervision: Acts as the regulator of banking industry Maintain prudential supervision of the banking industry as a means of maintaining financial stability1 Conduct supervision in specific areas and situations Independence and accountability: Appointment, removal, and term of office stipulations General provisions Information sharing: Establish a mechanism for information sharing
Article 6
The Final Report also recommends that the PBC establish a Financial Stability Division, which has now been set up within the PBC.
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1995 PBC Law
PBC Law Proposals
New PBC Law

Entry: (1) No provision on verifying the sources of capital; (2) Economic and competitive needs;

(1) Substantively verify the sources of shareholder funds; (2) Abolish economic and competitive needs; (3) Credentials of the shareholders of more than 5% and shareholders controlling the proposed bank; (4) Give refusal notice and refusal grounds; (5) Revoke a license if one or more conditions are not satisfied; Gradual expansion into securities, trust, insurance and nonbank firms, in particular via an independent subsidiary

(2) Abolished economic and competitive need; (3) Article 15: credentials of the shareholders of more than 5%; (5) Silent on whether to revoke a license if one or more conditions are no longer satisfied.

(1) Article 17, verification of the sources of shareholder funds; (4) Article 22: give refusal notice and refusal grounds; (5) Silent on whether to revoke a license if one or more conditions are no longer satisfied.
Secrecy restrictions: Prohibition from divulging state secrecy
Compliance with the obligation of professional secrecy
Compliance with the obligation of professional secrecy
(3) Credentials of the shareholders of more than 10% of capital; (4) No refusal notice and refusal grounds given to applicants; (5) Silent on whether to revoke a license if one or more conditions are no longer satisfied.
Restriction after leaving office: None
Central bank officials should be limited in working in financial institutions for a period following their term of office
None
Business Scope: Prohibition from engaging in securities and trust business and investment in nonbank firms
Article 43: leaves room for such an expansion
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1995 PBC Law

Accountability: Reporting, disclosure, auditing Financial Stability: Maintain safe and legal operations of financial industry via regulation Information sharing: NA
PBC Law Proposals

Reporting, disclosure, auditing, and judicial review
New PBC Law

Permission of new activities: No rules or standards of approval Prompt Corrective Action: No PCA provision

Publish approval standards and procedures

Article 18: publish the names of products in need of approval or registration
Reporting, disclosure, auditing The State Council shall set up a coordination mechanism for financial regulation Set up a mechanism for information sharing with other supervisors Implied in the Article on the provision by the PBC of specific loans
Set up Joint Financial Stability Committee
PCA laid down by the law at the level of NPC
Article 75: partial provisions for PCA
Articles 37 & 45: PCA
Set up a mechanism for the flow of information and communication
Consolidated Supervision: No provision Enforcement: No supervisory action for noncompliance with provisioning requirements Surveillance of auditing authorities Deposit Insurance Schemes: -
Consolidated supervision
Article 25: consolidated supervision
Lender of last resort: NA
Certain degree of legal certainty: such as time limits, penalty rates, decision procedures.
Corrective actions: consultation, moral suasion, reprimands, fines, dismissal of managers, increasing capital, revocation of license. External auditing Gradual introduction of schemes recommended
Article 45: corrections, suspension of operations, revocation of license -
Surveillance of auditing authorities
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1995 PBC Law
PBC Law Proposals
New PBC Law

(1) The numerator should be expanded from loan exposures to include on and offbalance sheet activities; (2) A clear definition on a single borrower constituting a single risk; (3) Supervisory review of sectoral and country exposures; (4) Large exposures restriction exemption; (5) Limits on the aggregate of all large exposures; (6) Large exposure threshold reporting.
Exposure controls: A simple provision that the ratio of loans to a single borrower and capital shall not exceed 10%.
A simple provision that the ratio of loans to a single borrower and capital shall not exceed 10%.
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FUNCTIONAL CHART OF PEOPLES BANK OF CHINA PROPOSED CHANGES

(figure 3)
Peoples Bank of China
Legal Department Monetary Policy Treasury Department Bureau of Currency, Gold and Silver Financial Stability Financial Stability Department AML Financial Crimes Anti-Money Laundering Department 7 other department (Research, Administrati Operations SPP SAFE Customs MPS CBRC, CSRC CIRC
Financial Intelligence Unit
Monetary Policy Department PBC Governor
SAFE
Financial Stability Division Financial Support Division Financial Restructuring Division
Monitor & advise LOLR operations Rehabilitation (coordination) Bank exit (coordination) Complex groups & conglomerates
Monetary Policy Committee
Direct reporting
Financial Insolvency Division Financial Groups Division
Regional directors
Sectoral directors
Expert directors
Diagram Legend:
Proposed Department
Proposed Division System Function
All financial, trade & transfer institutions
A related diagram of the Joint Financial Stability Committee is located in section VIII, on Financial Conglomerates, sub-section J.2., below.
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FINAL REPORT, SECTION II LEGAL FRAMEWORK
II. LEGAL FRAMEWORK A. Goals of Bank Regulation and Supervision Two fundamental goals of financial systems in countries everywhere are to facilitate the flow of funds from savers to investors through a credit system and to facilitate payments through a payment mechanism. When a financial system operates properly it facilitates the efficient allocation of scarce resources in order to promote economic growth and development so as to improve living standards. Various problems can arise, however, that disrupt the proper
functioning of financial systems. Indeed, there have been varying degrees of financial problems in more than two-thirds of the member countries of the IMF since 1980. These problems have occurred, moreover, in countries at all levels of development and in all parts of the world. They arose even in countries with fairly elaborate regulation and supervision regimes.1 The United States, for example, has had one of the most elaborate and extensive regulatory banking regimes in the world. Yet, throughout the 1980s and into the early 1990s, the U.S. experienced one of the lengthiest banking crises in the world that involved an unprecedented number of banking institution failures and costly resolutions. These recent developments underscore the reason all nations have established bank regulatory and supervisory structures to constrain and monitor the risk of banks and the financial system more generally. When properly designed, such structures lessen the likelihood that serious problems will arise. The specific legal structures that have been adopted by countries, however, differ in many significant respects and for a variety of reasons. Despite these differences the ultimate goals among countries with respect to the banking industry are to promote safe and
The content of this section was prepared by James Barth, Zhongfei Zhou, Rosa Lastra and Liguo Cui.
The two words regulation and supervision do not refer to the same concept or process. As Jerry L. Jordan, former president
of the Federal Reserve Bank of Cleveland states, regulation refers to the rules or procedures that are designed to govern an industrys behavior. It is the prescriptions or boundaries imposed on the industry by legislators and regulatory bodies in an effort to direct it.Supervision, on the other hand, is the monitoring or oversight function that takes place after the regulations have been passed. It ensures, among other things, that activities are conducted in accordance with those regulations see Effective Supervision and the Evolving Financial Services Industry, Economic Commentary, June 2001.
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sound banks more narrowly and a stable banking system more generally.2 Countries attempt to achieve these goals through a mix of government intervention and market forces when designing a national legal framework for the banking system. The primary regulatory and supervisory tools to contain bank risk-taking behavior, as broadly put forward in the New Basel Capital Accord, are various regulations imposed by the official regulators, especially capital requirements, supervisory review or the monitoring and enforcement of regulations, and market discipline or the enforcement of prudent behavior by financial market participants. Some of the more detailed aspects of various tools and specific ways in which they might be implemented to contain bank risk-taking behavior in the PRC will be discussed below. Before doing so, however, it is
important to discuss briefly the overall structure of the PRCs financial system.
B. The PRCs Financial System3 The PRCs banking system is comprised of four nationwide commercial banks (SOBs), 111 city commercial banks, numerous rural commercial banks, 758 urban credit co-operatives and 35,544 rural credit co-operatives. At year-end 2002, these four types of financial institutions dominated the financial system with nearly RMB 19 trillion ($2.4 trillion) in total assets, as indicated in Appendix A, Table 1.4 The market capitalization of the Shanghai and Shenzhen stock markets was only RMB 3.8 trillion and the total value of government bonds outstanding was just RMB 1.9 trillion, or a combined RMB 5.7 trillion. The total value of corporate bonds outstanding was even far smaller at less than RMB 0.2 trillion. Indeed, such bonds accounted for only about 1 percent of all funding sources for the non-financial sector in 2001, whereas loans accounted for nearly 70 percent. Banks clearly dominate the PRCs financial system at the present time. The ratio of bank assets to stock market capitalization plus bonds outstanding in the PRC exceeds 300 percent,
2
Some refer to micro-prudential regulation and supervision as involving individual banks and macro-prudential regulation and
supervision as involving overall systemic stability.

3
It might be noted that data and other information on the PRCs financial system as compared to many other countries financial
systems is either secret or difficult to obtain, and even then contains relatively little detail. More effort should be made to make such information more easily and readily available to the public.
4
Outstanding loans in foreign currencies amounted to about RMB 1 trillion and outstanding deposits in foreign currencies
amount to about RMB 1.2 trillion (see China Daily, August 20, 2003, p.5).
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which is far greater than the same ratio for most industrial countries and even many developing countries. India, Japan, Mexico, South Africa, and the United States, for example, all have ratios less than 100 percent. This situation emphasizes the overwhelming importance of the PRCs banks for the entire financial system. The four nationwide SOBs - the ICBC, the ABC, the CCB, and the BOC account for slightly more than two thirds of the total assets of the banking industry.5 These big four SOBs thus play a major role in the allocation of funds throughout the economy as well as serve as an important gauge by which to assess the overall health of the financial system.6 At the present time, however, the big four SOBs are struggling with a reported non-performing loan (NPL) ratio of 21 percent.7 The government responded to the NPL problem by forming separate asset management companies in 1999 for each of the big banks to help improve their financial situation.8
As an example of a corporate governance problem with these banks, Giovanni Ferri points out that The Bank of China has a
Board of Directors with 60 members, which clearly makes the Board only a formal and perfunctory committee, rather than a decision-taking one. In practice, the Party substitutes for the function of the Board of Directors: all the senior managers of the Bank of China are appointed by the Party Committee and in effect the Board of Directors is made up of inside directors (Giovanni Ferri, Corporate Governance in Banking and Economic Performance Future Options for PRC, Asian Development Bank Institute August 7, 2003).
6
There are also finance firms (with assets of RMB 0.4 trillion), securities firms, insurance firms and selected other types of
financial institutions. But they account for a relatively small portion of the overall financial system. Also, in the case of insurance firms they allocate over half of their assets to deposits at commercial banks due to restrictions on investing in securities and to the corporate bond market being so underdeveloped. Furthermore, there are three policy development banks that help relieve the state-owned commercial banks of their policy lending duties. The largest one is the China Development Bank with assets of RMB 1 trillion. These banks issue bonds that are typically bought by the commercial banks to obtain funds for development projects. These situations further underscore the importance of the banking industry for the overall allocation of savings to investment projects.
7
The government has directed these banks to lower the NPL ratios to 15 percent by 2005. It is reported that by the end of July
CBC had a NPL ratio of 15.4 percent and aimed to further lower it to less than 10 percent in 2 years (see Da Shun, Bank Juggles Assets, China Daily, August 27, 2003, p.6.
8
These four SOBs and other commercial banks have until recently focused on simply net interest income as the primary source
of total income. In developed countries non-interest income accounts for 30 to 70 percent of total income of banks. In the PRC, however, it is reported that this type of income only accounts for 13 percent of the total income of BOC; eight percent for CBC; five percent for ICBC; and less than four percent for the ABC. The PRCs banks, however, are now beginning to further tap into non-interest sources of income. See Dong Jian, Banking to Cost More, BizShanghai, September 2003, p.25.
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The overwhelming importance of the four SOBs to the entire financial system extends beyond their asset size. Being government-owned banks their overall portfolio composition has been largely determined by governmental factors rather than market-based assessments of risk and return.9 This situation raises the issue as how one most effectively establishes and enforces a prudential regulatory and supervisory regime when the governmental banking authorities oversee government-owned banks, and when these banks, in turn, lend to government-owned enterprises.10 Admittedly, the PRC is well aware of the dilemma this situation poses and has already instituted various reforms to help resolve it.11 This includes the privatization of stateowned banks and allowing broader and deeper entry into the domestic banking industry by foreign banks. In mid-2003 the PRC had one private bank and was considering authorizing still other private banks.12 At the end of October 2003, moreover, there were 190 operational foreignbanking offices in the PRC, including 157 branches with 11 sub-branches, and 15 locally incorporated legal entities with 8 branches and subsidiaries. In addition, there were 211
representative offices in the PRC. The total bank assets of the foreign banks, however, were only RMB 0.33 trillion ($39 billion), which included a mere RMB 39 billion denominated loans funded with just RMB 19 billion denominated deposits. 13 Importantly, however, the PRC is contemplating still further reforms beyond more privatization and greater foreign bank entry to
The PRC, of course, is not unique in the extent of government-ownership of banking assets. India and Germany, for example,
have a large portion of the total assets in their banking industries controlled by government-owned banks.
10
The situation is more complicated by the fact that interest rate controls limit the ability of banks to vary rates to reflect
differences in the risk of borrowers. This, in turn, weakens bank performance and impedes the efficient allocation of available funds to their most productive uses. The PRC is currently experimenting with a relaxation of these controls in certain parts of the country.
11
Indeed, the cumulative effect of more than two decades of economic reforms has enabled the PRC to achieve the fastest rate of
economic growth of any country in the world over this period.

12
There are also 11 joint-stock banks in the PRC. More generally, the goal of the PRC clearly should be significantly less
government ownership and direct control of the banking sector. Instead, the goal should be prudential regulation and supervision of the banking sector, which means focusing on banks risks and their ability to manage them rather then simply on banks compliance with regulations.
13
Foreign banks reported a NPL ratio of 6.2 percent as compared to the 21.4 percent ratio reported by the big four SOBs (see
Appendix A, Table 1). The PRCs regulators have allowed 37 foreign-bank branches to offer limited service in the yuan to corporate clients, but retail business remains off limits until 2006. Foreign banks can currently do so before 2006 only indirectly by acquiring stakes (up to 25 percent) in domestic banks.
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better assure that banks more adequately take into account both risk and return when making decisions.14
C. Issues in Regulating and Supervising Banks In theory, one might consider the issue of how to regulate and supervise banks to be relatively straightforward. One simply determines the total amount of capital that the regulatory and supervisory authority should require each and every bank to hold to promote safe and sound banks and thus overall stability in the banking industry. The amount required would reflect the risk of all the activities in which a bank engaged regardless of ownership and organizational structure, geographical location of operations, type of customers (i.e., individual or corporate, private or government, and foreign or domestic), scope of products and services offered, and type of currency in which transactions are conducted. One could, moreover, establish a single national regulatory and supervisory authority, whether as a part of the central bank or as a separate agency, duly allowing in the latter case for appropriate co-operation and co-ordination between them to deal with potential bank crises. In practice, however, such a goal is impossible to achieve. Countries therefore place various types of restrictions or limitations on banks to supplement inevitably imperfect capital requirements so as to contain excessive risk-taking behavior by banks as well as to achieve other policy goals. When considering the most appropriate legal framework for a country one must realize at the outset that there is no unique or cookie-cutter set of bank regulations and supervisory practices that is best for all countries at all levels of economic development and in all parts of the world at any one time yet alone over time. Different mixes of regulations and
14
It is interesting to note that a credit registration and consulting system was started in Shanghai in 1998 and began nationwide
networking at the end of 2002. On the basis of the system, Shanghais financial institutions may not only consult credit data inside and outside the city, but also request information and credit worthiness reports on corporate borrowers outside the city It is reported that Thanks to credit registration and consulting system, the average non-performing loan ratio was lowered to 6.8 percent at the end of 2002 for PRC banks in Shanghai, the lowest among all PRC banks in the country (see http://fpeng.peopledaily.com.cn/200303).
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practices across countries may be equally prudential for individual countries depending upon their specific circumstances.15 In some countries, moreover, the bank and non-bank financial regulatory authorities are not the only governmental authorities that determine what happens in the banking industry. In the PRC and elsewhere, for example, the courts also interpret the law that applies to banks and their interpretation may not always conform to that of the banking authorities. When a clear
demarcation of line of authority regarding important issues does not exist, considerable uncertainty and delay may arise as the ultimate decision maker is being determined and thus able to take final action.16 Also, in some countries like the PRC that are undergoing change in their banking sectors there may be situations in which existing laws do not authorize certain activities and ownership and organizational structures.17 Instead, there simply may be no legal prohibitions against them. In such cases exactly what can and cannot be done under the law may be decided on the basis of policy, and even then on a case-by-case basis rather than a more transparent and comprehensive basis. This type of situation can create a great deal of unpredictability for financial institutions when formulating their strategic business plans. The unpredictability created when policy is substituted for laws, rules and regulations can also make it difficult for the bank regulatory and supervisory authorities to decide when and how to respond to changing market conditions in a timely and appropriate manner. Furthermore, an issue that is being discussed in many countries around the world is what exactly constitutes a banking, securities or insurance product and thus which financial regulatory
15
This point is discussed more fully in James R. Barth, Gerard Caprio, and Ross Levine, Bank Regulation and Supervision:
What Works Best? Journal of Financial Intermediation, forthcoming. In this regard, a consensus seems to be emerging that the focus should be on the outcomes or goals of regulation and supervision, allowing banks the flexibility to meet these goals. The authorities would then focus on ascertaining the extent to which a bank is adequately measuring and managing its risk and would be granted appropriate authority to intervene at an early state to be sure any potential losses do not exceed capital.
16
Still other agencies can affect the banking industry, such as the State Administration of Foreign Exchange (SAFE) in the PRC,
which is pivotal in the area of foreign exchange transactions.

17
At present in the PRC, for instance, there are financial conglomerates but as yet no specific laws or regulations governing their
formation and activities. This issue is addressed later in this report.
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authority has jurisdiction over which products.18 This is further complicated to the extent that some products may contain elements of more than one type of product, thereby giving rise to socalled hybrid products.19 This is an important issue that should be addressed since new financial products are being and will continue to be introduced into the PRC, especially with the relatively recent establishment of three separate financial regulators-one each for banks, securities firms and insurance companies.20 Despite all the, albeit complicating, issues that have been raised one can nevertheless recommend a way to proceed with respect to several key regulations and supervisory practices that when combined help form a prudential legal framework for the banking industry. The New Basel Capital Accord mentioned earlier and expected to take effect in 2006 is useful in this regard. It contains three pillars that may provide a useful context in which to make a number of recommendations for the PRC. The pillars are capital requirements, supervisory review and market discipline. Each of these important components of a regulatory and supervisory regime will be discussed at some point in the context of a legal framework for banks in the PRC. Information on each of the components for selected countries will be provided throughout the discussion. This enables one to compare and contrast what is being done in different countries and thereby to better understand the context within which the recommendations are being made. It enables one, moreover, to assess those areas in which the PRC may be out of step with other countries. These types of comparisons may also be helpful if a WTO member were to encounter a dispute with other member countries over any of its bank regulations or supervisory practices. In such cases a country might be able to successfully claim that what it does is prudential by pointing to still other countries doing the same thing. An overarching recommendation is that the PRC should strive to achieve greater transparency, consistency and predictability in its overall legal framework. In meetings that were
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This, of course, is not a problem in countries with a single regulator of the financial sector. A related issue that arises in this regard is whether a new product that is modified after approval results in a violation. In this regard, it is reported that Wang Zhaohing, a CBRC director in charge of foreign bank affairs, pledged to enhance
regulation of new financial products launched by foreign banks in the coming years, with special attention to be paid to these troublesome banks (i.e., a few foreign financial institutions that had reported fraud profitability and violated the countrys banking industry regulations while operating their business in the PRC.) (see China Daily, August 26, 2003, p.5). It is not clear how the regulation of new financial products will be enhanced or why foreign banks are being singled out in this regard.
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held in Beijing and Shanghai a view commonly expressed was that in reforming the existing framework it should become more transparent, consistent and predictable as the PRC moves to a more market-oriented banking industry. The PRC should therefore aim for a clearer, more concise and prudential set of regulations and supervisory practices which will govern the operations and activities of banks and which will be applied consistently and fairly to all banks, especially as it fulfills its WTO commitments.
D. Inconsistencies in the Existing Legal Framework It is important to realize that subsequent to the PRC enacting both the central banking law and the commercial banking law, the State Council and the PBC have issued more than 3,000 laws, regulations, rules and guidelines relevant to the banking sector. As part of the effort to recommend ways to improve the legal framework, approximately two hundred of the most important of these laws, regulations, rules and guidelines have been analyzed for internal inconsistencies and weaknesses. The results of this analysis are as follows.
1. City Cooperative Banks Form

In theory, a city cooperative bank is a different organization than a joint-stock bank. Yet, Article 2 of the Provisions on the Administration of City Cooperative Banks states that a city cooperative bank is a commercial bank taking the form of a joint-stock limited company. Given that there is a difference in the legal nature of a cooperative bank and a joint-stock bank, the proposed Commercial Bank Law should differentiate explicitly between the two forms of commercial banks to avoid any inconsistency.
2. City Cooperative Banks Preparative Period

Under Article 8 of the Provisions on the Administration of City Cooperative Banks, if, after the expiry of the preparative period for establishment (six months), applicants who do not satisfy the requirements for opening a business will have their qualification automatically cancelled. This provision is inconsistent with Article 18 of the Provisions on the Administration of Financial Institutions, insofar as it permits an applicant to extend the preparative period by up to one year
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subject to the approval of the PBC under special circumstances. This inconsistency in the articles should be resolved.
3. Post Qualifications for Senior Management of Financial Institutions

According to Article 27 of the Commercial Banking Law, no person shall hold a senior management position at a bank who: (1) is sentenced due to committing embezzlement, bribery, appropriation, and crimes of destroying social economic order, or is deprived of political rights due to committing crimes; (2) is a director or manager of a bankrupt company or enterprise and takes individual responsibility for such bankruptcy; (3) is a legal person of a company or enterprise whose license is revoked due to violations of laws and takes individual responsibility for such revocation; or (4) does not repay a relatively large amount of debts due. Yet, the Measures on the Administration of Post Qualifications for Senior Management of Financial Institutions issued by the PBC in 2000 includes four additional restrictions. These include persons: (1) taking individual responsibility or directly leading responsibility for the losses of financial institutions or other enterprises arising from a lapse in work or economic cases; (2) committing fiddles such as providing fraudulent information; (3) violating social common ethics such as committing acts of gambling, drug addiction, and whoring, and producing adverse effects; (4) whose qualifications for a post at a financial institution has been cancelled cumulatively twice by the PBC or other financial authority. This means that persons who are permitted to be part of senior management under the Commercial Banking Law may nevertheless be prohibited from holding a senior management position at a commercial bank under the Measures on the Administration of Post Qualifications for Senior Management of Financial Institutions. It seems inappropriate for the Measures to prohibit a person from holding a senior management position who is not prohibited from doing so under the Commercial Banking Law. A solution to this inconsistency would to modify the proposed Commercial Banking Law to include the four additional factors into the disqualification list.
4. Business Scope Approval

In the case of business scope, the PBC Law grants the PBC the authority to approve financial institutions business scope according to regulation (Article 31). The Commercial
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Banking Law also provides that the business scope of a commercial bank shall be determined by the Articles of Association of a bank and be reported to the PBC for approval. However, neither of the laws clarifies by which standards or rules the PBC shall approve the business scope of a bank. It is recommended that the approving standards or rules used by the PBC or CBRC be published. In May 2003, the CBRC issued the Decisions on the Adjustment of the Administration Methods and Procedures for Bank Market Entry. According to the Decisions, the branch of a commercial bank, under the authorization of its head office, is allowed to conduct the same activities that its head office has obtained approval to engage in from the PBC. However, this provision only applies to commercial banks expanding into new activities. It is silent as to whether the business permit should be granted to cover both the head office and branch of a commercial bank or separate permits are required for each. The Interim Provisions on Intermediate Business of Commercial Banks apply to banking institutions in the PRC established according to the Commercial Banking Law, which means foreign commercial banks are included. However, the application procedures provided by Articles 13 and 14 of the Interim Provisions are only for PRC banking institutions. It is recommended that the application procedures should apply equally to both domestic and foreign banks. In October 1997, the PBC issued the Interim Measures on Syndicate Loans. Article 6 of these Interim Measures requires banks to report its syndicate loans to the branch of the PBC of its location for record. However, it is unclear whether the term its location means location of the borrower or of the lending bank. According to Article 8 of the Commercial Banking Law, Commercial banks must not do any harm to the interests of the State and the society. Article 34 states, A commercial bank should issue loans in accordance with the need of the national economy and social developments and under the guidance of the State industrial policies. Both these goals leave commercial banks open to political management, in conflict with credit-based decisions and the avoidance of NPLs. Both articles should be repealed in the new revision of this law.
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5. Consolidated Accounting Treatment

According to the Interim Measures on Consolidated Accounting Statements of Wholly Stateowned Commercial Banks, economic entities of a bank that conduct non-financial business may not be consolidated into the banks consolidated accounting statements. However, as the Basel Committees 1997 Core Principles for Effective Banking Supervision point out, supervisors need to take into account the fact that non-financial activities of a bank or group may pose risk to the bank. Supervisors should decide which prudential requirements will be applied on a bank-only (solo) basis, which ones will be applied on a consolidated basis, and which ones will be applied to both cases. For this reason, it may be imprudent to exclude any non-financial economic entity from the consolidated accounting statements.
6. Dividend Policy Restrictions

In June 1998, the PBC issued the Circular on Several Issues relating to Strengthening Supervision of City Commercial Banks. Article 6 of this Circular provides that a city commercial bank whose capital adequacy is less than 8 percent or whose non-performing loans exceed 30 percent shall not allocate dividends in cash to its shareholders. In February 1999, in the Circular on Forwarding the State Administration of Taxations Implementing Measures on Financial Administration of City Commercial Banks, the PBC put forward the same restriction. However, under the Commercial Banking Law, the PBC is only granted authority to order the commercial bank to correct its non-compliance with capital adequacy and other assets and liabilities management requirements. Since the power to allocate dividends is granted to the general shareholder meeting by the Company Law, these Circulars may inappropriately restrict the power of the general shareholder meeting in allocating dividends. A solution to this inconsistency is to enact a law at the level of the NPC for this purpose.
7. Loan Loss Provisioning

In April 2002, the PBC issued the Guidelines on Provisioning for Bank Loan Losses. These Guidelines apply to all types of banking organizations established in the PRC, including foreign
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banks.21 A bank may set side its specific provision on a quarterly basis according to the following percentages: provisions for mentioned loans are set aside at 2 percent, sub-standard loans at 25 percent with a floating range of 20 percent, doubtful loans at 50 percent with a floating range of 20 percent, and loss loans at 100 percent. By contrast, the PBC prescribes different provisioning requirements for city commercial banks. As issued by the PBC in November in 2002, the Opinions for Implementing Five Classifications of Loan Quality at City Commercial Banks provide that specific provisions for mentioned loans are set aside at not less than 2 percent of the non-collateralized amount of the loan concerned, specific provisions for sub-standard loans at not less than 20 percent of the noncollateralized amount of the loan concerned, specific provisions for doubtful loans at not less than 40 percent of the non-collateralized amount of the loan concerned, and specific provisions for loss loans at not less than 100 percent of the non-collateralized amount of the loan concerned. The non-collateralized amount is defined as the difference between the principle and interest of the loan and the value of collateral. According to these standards, the new law (rule) is superior to the old law (rule), but the Opinions shall only apply to city commercial banks. It is doubtful whether such a different arrangement can be justified on a prudential basis. Besides, it also creates unfair competition between city commercial banks and other types of commercial banks. According to Article 14 of the Guidelines on Provisioning for Bank Loan Losses, the Guidelines shall apply to foreign banks in the PRC. However, the Implementing Rules for the Income Tax of Foreign-Invested Enterprises promulgated by the State Council in June 1991 provide that enterprises engaged in the credit and leasing business, and so on, may set aside provisions year by year for doubtful debts to not exceed 3 percent of the year-end balances of their loans (not including inter-bank loans) or of their accounts receivable, notes receivable and other receivables, and deduct the provisions from the taxable income of that year (Article 25). It is unclear whether foreign banks shall set aside loan loss reserves based on the Implementing Rules for Income Tax of Foreign-Invested Enterprises or the Guidelines on Provisioning for Bank Loan
21
An issue that arose in one of our meetings is the distinction between a guideline and a regulation. It would be helpful for a
clear distinction to be made in writing and made publicly available.
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Losses, although, in theory, the Implementing Rules shall apply insofar its legislative rank is higher than that of the Guidelines.
8. Provisioning Consistent Treatment

The Circular on the Controlling and Monitoring Indices and the Examination Methods for the Administration of Assets and Liabilities Ratios of Commercial Banks of 1996 includes doubtful loan provisions and bad debt provisions into supplementary capital. Yet, with the application of the Guidelines on Provisioning for Bank Loan Losses, general provisions should replace doubtful loan provisions and bad debt provisions as an element of supplementary capital.
9. Separation of Responsibility
Under the Guidance on the Off-Balance Sheet Risk Management of Commercial Banks, the board of directors or senior management shall review and examine management strategies and procedures for material off-balance sheet risks and assume ultimate responsibility for it. However, from the point-view of general company law theory and according to the Basel documents on risk management and U.S. practice (Rating the Adequacy of Risk Management Processes and Internal Controls at State Member Banks and Bank Holding Companies, SR 95-51), the board of directors, rather than senior management, should approve the overall risk management strategies and significant policies and thus assume ultimate responsibility of the level of risk taken by the bank. Senior management should be responsible for implementing risk management strategies and policies approved by the board of directors. It is therefore more appropriate to separate the responsibility of the board of directors and senior management with respect to off-balance sheet risk (or any other type of risk) management.
10. Shareholder Powers

The PBC issued the Guidance on Internal Controls of Commercial Banks in September 2002, under which the board of directors shall determine the overall operational strategies and material policies of a commercial bank. However, according to the Company Law of 1999, the determination of overall strategies and material policies should fall within the scope of the power
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of the general shareholder meeting. The Guidance inappropriately enlarges the power of the board of directors. Under Article 16 of the Guidance on Corporate Governance of Joint-Stock Commercial Banks issued by the PBC in May 2002, the Articles of Association of a commercial bank should provide that any shareholder holding solely or jointly 5 percent of the total voting shares shall have the right to propose interpellation. However, the Company Law grants any shareholder, no matter how many shares held, the right to propose interpellation about a companys operations.
11. Board of Directors Special Committees

According to Article 52 of the Standards for Listed Company Corporate Governance issued by the CSRC, all members of the special committees under the board of directors shall be directors. However, the Guidance on Corporate Governance of Joint-Stock Commercial Banks issued by the PBC only requires that the persons in charge of the special committees of a jointstock bank be directors. It is not clear which rule should be followed by a listed bank in this regard. In addition, under Article 52 of the Standards for Listed Company Corporate Governance, the board of directors may set up a nomination committee and an auditing committee. However, according to Article 63 of the Guidance on Corporate Governance of Joint-Stock Commercial Banks, the two committees should be set up under the supervisory board. It is thus unclear which rule should be followed by a listed bank.
12. Financial Institutions in Difficulty

There are several laws and rules that deal with problem banks and other financial institutions. Under the Commercial Banking Law (Article 64), a commercial bank that is or may be in a credit crisis that seriously affects the interests of the depositors, the PBC may take over the commercial bank. The State Councils Regulations on Revocation of Financial Institutions of 2001 (Article 5) provide that a financial institution shall be revoked if it has operated illegally and been poorly managed with the result that its continuous existence will seriously damage financial order and social public interest. In March 1998, the PBC issued the Interim Measures on Preventing and Handling Payment Risk of Financial Institutions.
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These Interim Measures

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(Article 26) provide that the provincial branch of the PBC shall, with the permission of the local government, close a financial institution if the financial institution has: (1) a serious payment crisis; (2) assets insufficient to meet its obligations; (3) seriously illegal operations; or (4) shareholders unable to cover losses or inject new funds. All these provisions described stipulate three measures that can be taken against a problem financial institution, namely, take-over, revocation and closure. However, the demarcation line between the requirements for applying each of the three measures is not clear-cut. Article 24 of the Interim Measures on Preventing and Handling Payment Risk of Financial Institutions provides that the PBC may take over a financial institution if it has serious payment risk, its current management is unable to resolve the risk, and new management will not be available within a short time. This requirement is different from that provided for in Article 64 of the Commercial Banking Law noted above. It is doubtful whether the PBC can authorize itself, through Article 24 of the Interim Measures on Preventing and Handling Payment Risk of Financial Institutions, to carry out a takeover action against a commercial bank that does not fall within the scope of Article 64 of the Commercial Banking Law. Under Article 71 of the Commercial Banking Law a bank shall be declared bankrupt by the peoples court with the permission of the PBC if it is unable to repay its due debts. However, the Interim Measures on Preventing and Handling Payment Risk of Financial Institutions provide for different conditions for bankruptcy declaration. Subject to Article 27 of these Interim Measures, a financial institution, which has serious payment risk and has insufficient funds to meet its obligations shall be declared bankrupt if its shareholders give up salvage. A financial institution shall also be declared bankrupt if it is found that its assets are insufficient to repay its obligations and its creditors do not agree to mediation after it is closed by the PBC. Under the Interim Measures, two additional conditions, namely, shareholders give up salvage and creditors do not agree to mediation, are added. It is doubtful whether the change made by the Interim Measures on the bankruptcy conditions of the Commercial Banking Law is valid as the Interim Measures are junior to the Commercial Banking Law.
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13. Fines
In February 1999, the State Council promulgated the Measures on Punishment of Violations of Financial Laws and Regulations, under which the merger or removal of the branch of a financial institution without prior approval shall be fined ranging from RMB 50,000 to 300,000. A corresponding Article in the Commercial Banking Law is Article 75, under which a commercial bank with illegal income shall be fined from one to three times its illegal income and fined from RMB 50,000 to 300,000 without illegal income. As a result of this situation, it is unclear how much a commercial bank with illegal income shall be fined. For those banks that change
shareholders without approval, they may be fined ranging from RMB 50,000 to 300,000 under the Measures on Punishment of Violations of Financial Laws and Regulations. However, the fine for the same violation under the Commercial Banking Law ranges from RMB 10,000 to 100,000. Such an inconsistency may leave the regulator in a dilemma with respect to punishing the conduct of illegally changing shareholders.
14. Branch Closure Rules

Under the Detailed Implementing Rules for the Regulations on the Administration of Foreign Financial Institutions (DIR), the closure of a wholly foreign-owned bank or a jointventure bank is subject to the Regulations of Financial Institution Closure, with the result that individual deposits (principal and interest) are repaid first in liquidating its assets. In contrast, closure of a foreign bank branch is subject to the relevant provision of the Company Law according to the Detailed Implementing Rules. The so-called relevant provision is Article 195(2) of the Company Law, under which the order of priority is liquidation expenses, staff wages and labor-insurance premiums, taxes due and the companys ordinary debts. Generally speaking, savings deposits can be regarded as a banks ordinary debts. In other words, in the case of a foreign bank branch closure, individual deposits cannot be repaid in preference to other debts of a bank branch as in the case of closure of a wholly foreign-owned bank or a joint-venture bank.
E. Recommendations for the Design of a Central Bank Law With the transfer of responsibility for bank supervision from the PBC to the CBRC, a new central bank law needs to be drafted to redefine the PBCs main objectives and its coordination
role in maintaining financial stability. The current central bank law, the Law of the Peoples Republic of China on the Peoples Bank of China of 1995, is the first central bank law of the PRC. As other first-generation central bank laws of emerging market economies, it reflects a very close relationship between the central bank and the State Council. In moving to a next-generation law, the PBC can increase its effectiveness if the new law clearly provides for a maximum degree of independence and operational autonomy from other institutions of social and political influence.
1. Summary of Recommendations
The PBCs main objective will be monetary stability. The PBC will also contribute to financial stability, through its lender of last resort role, in close co-operation with the CBRC and the other supervisory agencies.
The PBC will be independent from the Government in the conduct of its monetary policy operations. The PBC may not be compelled to finance government deficits via central bank credit. The development of a liquid money market is fundamental in this respect.
Interest-rate decisions will be taken by a newly created Monetary Policy Committee, whose composition and functions will reflect the guarantees of independence, such as security of tenure, non-arbitrary dismissal procedures and restrictions on lending to the public sector.
A new standing committee, which could be called Joint Financial Stability Committee, comprising representatives of the PBC, the CBRC, the other supervisory agencies, and the MOF will be set up to deal with banking and financial problems.
There will be clearly stipulated mechanisms to ensure the flow of information and communication between the PBC, the CBRC and the other supervisory agencies.
The PBC shall have clear procedures to maintain accountability and transparency.
2. Objectives of the PBC Modern central banks have two core objectives: monetary stability and financial stability. Monetary stability refers both to the internal value of money and to the external value of the currency. Financial stability is a broad and discretionary concept that generally refers to the safety and soundness of the financial system and to the avoidance of systemic risk (all of them also
discretionary concepts). It is only by reference to crises and bad times that a certain consensus emerges as to what financial stability ought to include. Despite the importance of financial stability as a central-bank goal, many central-bank laws do not specifically mention it. The trade-off between objectives is often a political decision. However, the consensus surrounding the need to de-politicize monetary stability by delegating control over the money supply to an independent central bank, is a recognition that such goal should not be included in the electoral agendas, but should be a common denominator accepted by all political forces. In Germany, the pre-1999 Bundesbank stated as its secondary objective to support the general economic policies of the Government (including growth and employment). German commentators of the Bundesbank law referred to this provision of the law (which is also replicated in the EC Treaty with regard to the ESCB) as the squaring of the circle, given that such economic policies could some times conflict with the sacrosanct goal of price stability. The new central bank law of the PRC should explicitly mention monetary stability as the primary objective and also financial stability. The actual wording of the objectives of the PBC could read as follows: The primary objective of the PBC shall be to maintain monetary stability. Without
prejudice to the achievement of this objective, the PBC shall support the general economic policies of the State Council, including its objectives for growth and employment. The PBC shall also contribute to safeguard the stability of the financial system. It should be noted that monetary stability can be defined in narrow terms or in broad terms. As discussed below, if price stability is defined in narrow terms, as it is in the UK and New Zealand (an inflation target of 0-2 or 2.5% annual increase in the Consumer Price Index or CPI), then performance accountability becomes easier than if the goal is defined in broad terms or if there are multiple goals with no explicit ranking amongst themselves. However, in the current economic climate, where deflation is a real threat in some countries, such as Japan, it probably suffices for the law to state that monetary stability is the primary objective. Since monetary policy is essentially a single instrument, it cannot simultaneously be assigned to more than one objective. If a monetary tool is assigned two objectives, for example, it is unlikely to achieve both and may end up achieving neither. How widely that is appreciated
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appears in the Appendix I. Some central bank laws enumerate the objectives of the central bank (e.g., the European Union, US, Japan and Poland), while other countries focus on the single objective of monetary policy, such as the 1995 PBC Law and the 1998 Bank of England Act.
3. Functions of the PBC, with an Emphasis on Monetary Policy The listing of the main functions of the PBC needs to take into account the objectives of the central bank on the one hand and the functions of the CBRC. If the primary goal is monetary stability, then it follows that the main function to be performed by the PBC is monetary policy. This is the case in most of the central bank laws surveyed in appendix I. The provisions relating to monetary policy should encompass: (1) some organizational issues, such as the need to establish an independent Monetary Policy Committee of a technocratic nature (i.e., based on experience and expertise); (2) some operational issues, such as the instruments of monetary control available to the monetary authorities. Market-related (indirect) instruments of monetary control, such as discount policies, open market operations and reserve requirements, are to be preferred over direct instruments, such as credit ceilings or interest rate controls. However reliance upon market-related instruments needs to be accompanied by the development of the money market. The PBC should continue to have the monopoly power over the issue of Renminbi and will continue to administer its circulation. The PBC should also continue to act as the bankers bank, providing a number of services to the banking system through the orderly operation of the payment system and discount operations (including emergency liquidity assistance). The PBC should also continue to provide services to the State Council in its role as the governments bank, though, the law should restrict the financing of government deficits via central bank credit, as discussed below. However, it should continue to perform other roles, such as fiscal agent and adviser to the State Council on issues of its competence. It should also have responsibility to hold and manage the official foreign exchange reserves and gold reserves (typically owned by the Government) and it should continue to participate in international financial activities and perform other tasks such as collection of statistical information and acting as depository of accounts of other central banks and international financial institutions.
4. Independence of the PBC The case to grant independence to the central bank is based upon economic, political and technical considerations. The main argument for independence from political instruction is the need to give monetary policy the credibility and long-sightedness to achieve price stability. The skills, expertise and superior qualifications of central bankers compared to politicians with regard to the conduct of monetary policy, reinforce the case for independence. It is recommended that the PBC be granted a significant degree of independence from the State Council, both in its policies and in its budgeting. In this respect, it is recommended that the following elements be included in the law: (1) A provision declaring that the PBC will be independent from the State Council and that interest rate decisions will not be subject to political influence; (2) A number of provisions regulating the organization of the PBC and its institutional relationships with the State Council. These could be called organic guarantees of independence.22 In particular, a law on central bank independence should guarantee security of tenure and well defined appointment and removal procedures for central bank board members; (3) A provision limiting the PBCs lending to the public sector. A truly independent central bank should have complete command over its own credit and, in particular, should be under no obligation to extend credit to the government; and (4) A degree of financial and administrative autonomy. Regulatory powers. The power to issue rules and regulations is a measure of the autonomy of an agency. However, while in the USA this rule-making power of independent regulatory commissions is consistent with the administrative law tradition of the country, the legitimacy of rules and regulations issued by the central bank (or by an independent agency) and not directly by the government has been a contentious issue in civil law countries.
22
The legal framework of independence ought to include a number of organic and functional guarantees that range from the
appointment and dismissal procedure to the relations between the central bank and the Minister of Finance.
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It is important to bear in mind that most countries do not have goal independence (i.e., the ability to choose the goal), but do have instrument independence, i.e., the ability to choose the instruments necessary to achieve the goal.
5. Organization of the PBC There should be a Governing Board to decide on all non-monetary policy matters and a Monetary Policy Committee to decide (with a degree of autonomy) on monetary policy matters. The provisions relating to the appointment, dismissal and term of office of the Governor and of the members of the Monetary Policy Committee will give an indication of the degree of dependence or independence that the State Council wishes to grant to the PBC. There is an extensive literature on the need to provide for what could be called a pluralistic appointment procedure, to avoid its politicization. A pluralistic appointment procedure can include In a geographically
membership based upon (a) region, (b) sector and (c) expertise.
decentralized structure of government, membership on the basis of region is important so as to represent the various interests of various parts of the country. Membership based upon sector refers to the inclusion of the various sectors of the economy: industry, commerce, agriculture, etc. For instance, the U.S. FED and the ESCB combine a geographic criterion and criteria based on expertise. Another recommendation is for professional independence, which is enhanced by the appointment of qualified candidates, well versed in monetary economics and central banking theory and practice. Central bank officials should perform their duties on a full-time basis (with the possible exception of academic engagements). A central banker should not be
simultaneously a financial adviser, an employee or a shareholder of a bank or a member of the legislature, as those occupations would engender conflicts of interests. Central bank officials should also be limited in pursuing private employment in credit and financial institutions for a reasonable period following their term of office. These restrictions are designed to preclude their susceptibility to private incentives while in office. Such provisions are particularly necessary to avoid the capture of the regulator by the regulated institutions. Safeguarding independence refers to the procedures for dismissal of central bank officials. Grounds for dismissal should be clearly defined in the law, including criminal offence or serious
misconduct and permanent incapacity. Grounds for dismissal should not include displeasure with central bank actions, or criticism that the Governor or other members of the governing bodies are not fulfilling their obligations. The Monetary Policy Committee should have responsibility for formulating and implementing monetary policy. The MPC would consist of (1) the Governor and Vice Governor of the PBC, (2) a half dozen members appointed by the Premier of the State Council, showing due regard to fair representation of the financial, agricultural, industrial, and commercial interests of society. The Governor of the PBC should be the chairman of the Monetary Policy Committee. In the PRC, both the PBC and the MOF are currently under political instruction, ie., they are at the same level under the State Council. If the PBC is going to be granted independence, that would mean that neither the State Council nor the MOF could give instructions to the PBC in the exercise of its delegated powers. The MOF would continue to be a government department, but an independent PBC would become a technocratic institution with freedom to adopt monetary policy decisions within the scope of its delegated powers in order to achieve the objectives entrusted to it in the new legislation.
6. Financial Stability and Lender of Last Resort Within the context of separated authority, the following issues ought to be considered in the new PBC law: (a) Prudential supervision and financial stability; (b) Lender of last resort operations; and (c) Co-ordination, co-operation and exchange of information. (a) Prudential supervision and financial stability The PBC should establish a Financial Stability Division, consisting of those with bankingsupervision experience. This division would brief the Governor and the Governing body on issues of financial stability, such as: monitoring developments in the financial system both at home and abroad, including the links between individual institutions and between financial markets;
analyzing the health of the domestic and international economy; maintaining co-operation with financial supervisors both domestically and internationally; and promoting sound financial infrastructure including efficient payment and settlement arrangements.
(b) Lender of last resort operations Though the operation of LOLR is often surrounded by ambiguity (economists refer to it as constructive ambiguity), there are a few principles that are generally applied. The central bank should: (1) prevent temporarily illiquid but solvent banks from failing. This type of lending is by nature short-term; (2) be able to lend as much as it is necessary, but charge a penalty rate; (3) accommodate anyone with good collateral, valued at pre-panic prices; (4) make its readiness to lend clear in advance; (5) maintain its LOLR role as discretionary, not mandatory; and (6) not be the sole point of determination as to whether a bank is of illiquid or insolvent, or whether its failure can trigger systemic instability; those decisions should be taken together with the CBRC or other lead regulator, through the proposed Joint Financial Stability Committee. Most central banks laws provide scarce guidance with regard to their lender of last resort operations. One exception is the US legislation on this topic, which happens to be very detailed and rather extensive. There are rules that specify the short-term nature of the lending (60days, 120 days, etc) as well as the penalty rate applicable and the type of instruments that can be used as collateral. Though a major principle of LOLR operations is that the institutions should be illiquid rather than insolvent, in practice, insolvent institutions often receive LOLR assistance. It will be useful, therefore, for the new central banking law to stipulate specific time limits, penalty rates and obligations of management, depositors and shareholders, in order to discourage insolvent institutions potential abuse of the facility. In addition, though the funds in a lender of last resort
operation will come from the PBC, the actual decision to provide such assistance needs to be made in expeditious consultation with the MOF and the CBRC. (c) Co-ordination, co-operation and exchange of information To formalize and facilitate the adoption of such decisions, it is recommended that the PRC create a new high-level standing committee, which could be called the Joint Financial Stability Committee, made up of representatives from the PBC, the MOF, and the CBRC. This Committee will deal with threats to the stability of the financial system, in particular in cases where emergency liquidity assistance is needed. Members of the CSRC and of the CIRC should also be included in the committee and take a leading role if the problems concern a financial conglomerate, a securities firm or an insurance firm. It is important that the responsibilities of each member of the Joint Financial Stability Committee be defined clearly according to the principles of: regular and speedy information exchange, efficiency (avoiding duplication), accountability and transparency.
7. Accountability and Transparency Accountability requires, at the very least, that the central bank explain and justify its actions and decisions and give account of the decisions made in the execution of its responsibilities. Transparency is the degree to which information on those decisions is available. The provision of information is hardly ever a neutral account of what happened; hence the need for an explanation or justification of the central banks actions or decisions. Lawyers and economists tend to give emphasis to different issues when they try to measure accountability. Lawyers emphasize the institutional dimension, in particular parliamentary and judicial review. The former is exercised through a variety of procedures and mechanisms,
including annual reports and appearances of the Governor and other officials on a regular basis. Judicial review of the central banks actions and decisions is essential to prevent and control the
arbitrary and unreasonable exercise of discretionary powers. The discretion of central bankers or any other officials - should never be unfettered but subject to legal control.23 Economists, while accepting this institutional articulation of accountability, tend to put the emphasis on two operational means of achieving accountability, namely, disclosure and performance control. Disclosure in the operation of monetary policy is a market-based form of accountability. Performance control, the other means of achieving accountability, can be
facilitated, first, by the existence of one, rather than multiple goals or by their unambiguous ranking and, secondly, by the existence of a clearly stated and narrowly defined goal. Clear reporting and auditing requirements should be included in the new PBC law. Under the PBC Law of 1995, the PBC reports to the National Peoples Congress. The State Council will report the PBCs monetary policy and its other activities to the National Peoples Congress. The Bank will also publish reports on monetary policy, financial statements, its decisions, rules and other activities in an official gazette. The staff of the PBC will be required, even after their duties have ceased, not to disclose information of the kind covered by the obligation of professional secrecy. The accounts and financial statements will be audited by independent external auditors, recommended by the Governing Board and approved by the State Council. The auditors report will be forwarded to the State Council.
F. Specific Issues and Recommendations Beyond these board recommendations we now turn to those that are more narrowly focused on different key areas of banking. More specifically, the different areas in which international comparisons and recommendations are provided have been broken down into the following categories:
23
Independence and accountability can be seen as opposite ends of a continuum. While too much independence may lead to the
creation of an unacceptable state within the state, too much accountability threatens the effectiveness of independence, and in some instances (particularly in the case of the exercise of a government override) may actually nullify independence. The optimal trade-off between independence and accountability varies from country to country. The debate about independence and accountability resembles, the philosophical debate about freedom and responsibility: independence without accountability would be like freedom without responsibility.
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1. regulatory and supervisory structure, scope, independence and accountability; 2. entry into banking; 3. ownership structure; 4. scope of activities; 5. capital requirements; 6. external auditing requirements and examinations; 7. liquidity and diversification requirements; 8. provisioning requirements; 9. accounting and information disclosure requirements; 10. discipline and problem institutions and insolvency; 11. risk concentration; and 12. deposit insurance schemes. While not exhaustive, these categories capture most of the key aspects of banking that typically are included in the domain of a prudential regulatory and supervisory regime.
1. Regulatory and Supervisory Structure, Scope, Independence and Accountability Perhaps the best place to begin when considering a prudential legal framework for the banking industry is the structure, scope and independence of the bank regulatory and supervisory authorities.24 Each of these different aspects will be considered in turn: (a) Structure Discussion. There are different ways to structure bank regulation and supervision. The choices involve whether there should be one or multiple banking authorities and whether the
24
For a recent survey of these issues and some empirical evidence on whether the choices that different countries have made
matters for bank performance, see James R. Barth, Daniel E. Nolle, Triphon Phumiwasana, and Glenn Yago, A Cross-Country Analysis of the Bank Supervisory Framework and Bank Performance, Financial Markets, Institutions & Instruments, 12(2), May 2003, pp.67-120, Malden, MA: Blackwell Publishing Inc.
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central bank should be one of these authorities if not the only one. Two advantages for choosing a single banking authority is to avoid unnecessary duplication costs and to minimize overlapping jurisdictional disputes. Two disadvantages are that a single authority will eliminate regulatory competition, thereby potentially impeding financial innovation, and will be more susceptible to regulatory capture by those being regulated. Whether based upon a weighing of such advantages and disadvantages or not, countries around the world have frequently chosen a single bank regulatory and supervisory authority. Appendix A, Table 3 presents information for 18 countries in which this is the case for all but a few countries. It might be noted that the U.S. has the greatest number of banking authorities of any country in the world. This situation, however, is more an anomaly than an example for other countries to follow. As to whether the central bank should be a regulator and supervisor, some argue that central banks typically enjoy a substantial degree of independence and a relatively skilled staff. Such benefits, however, may not be available to a separate banking authority. Also, some argue that in conducting monetary policy and when acting as a lender of last resort, a central bank must have access to information on the condition of the overall banking industry as well as individual banks. These are arguments made by those who favor assigning responsibility for bank regulation and supervision to the central bank. Others argue, however, that combining all these functions in a central bank conveys too much power to it. Also, it is argued that any information that is needed by a central bank can be made available to it by a separate bank regulator and supervisor through a joint coordination committee, an MOU or some other formal arrangement. Furthermore, some argue that a central bank may compromise monetary policy at times to benefit banks when they are being regulated and supervised by it. The trend in recent years has been to transfer bank regulation and supervision from the central bank in countries where it was located to a separate banking authority. This has happened, for example, in Germany, Japan, South Korea, and the United Kingdom, as Appendix A, Table 3 shows. Once again, the U.S. is an exception to what has recently been done in several other industrial countries. Recommendation. The PRC established a separate banking industry authority (CBRC) in March of 2003. This is consistent with recent developments in several other countries as already noted. Since the current central banking law and commercial banking law are almost silent on the
issue of the structure of bank regulation and supervision, a legal framework for the separate banking authority is urgently needed to comport with the establishment of the CBRC. Such a framework should at least include the following components: (1) general duties; (2) responsibilities and functions; (3) regulatory objectives; (4) organizational arrangements; (5) appointment and salaries of staff; and (6) protection from liability. As discussed below, however, it is recommended that appropriate formal arrangements be put in place to be sure that the PBC receives all the co-operation and all the information it needs from the other financial regulatory and supervisory authorities to fulfill its responsibilities, through the formation of a Joint Financial Stability Committee.25 More generally, the form of cooperation between the PBC, the CBRC and the State Council is a major issue and already has been intensively discussed elsewhere. As has been done in many other countries, the PRC may decide to draft specific guidance in the new central banking law or in the new financial conglomerates law or to adopt an MOU, focusing mainly on the responsibilities of these agencies based on the principles of clear accountability, transparency, duplication avoidance and regular information exchange. (b) Scope Discussion. Scope refers to range of financial products and institutions over which the bank regulatory and supervisory authority has jurisdiction. Combining all financial regulation and supervision within the same authority offers the advantage that it would allow for economies of scale and scope to be realized. The disadvantages are that such a consolidation would produce an extremely powerful authority and a potentially unwieldy organization with its own internal cooperation and co-ordination problems. To date, relatively few countries around the globe have adopted this centralized approach, perhaps reflecting its drawbacks (see Appendix A, Table 3 and Appendix I). An issue that does arise, however, concerns the treatment of financial conglomerates or financial holding companies (i.e., firms that own or control two or more of the following: banks, securities firms, insurance companies, real estate firms, and other financial and non-financial firms). Special attention is devoted to these types of firms in Section VII of the report. Suffice it
25
It was pointed out in one of our meetings that the PBC might have to conduct some inspections to be sure banks are in
compliance with interest rate and inter-bank lending regulations. This issue further underscores the need for co-operation and coordination between the PBC and CBRC, as well as other governmental agencies influencing the banking industry.
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to note here that their regulatory and supervisory treatment differs somewhat across countries. In the U.S., for example, with the recent enactment of the Gramm-Leach-Bliley Act, the Federal Reserve is the umbrella regulatory and supervisory authority for financial holding companies (with separate banks, securities firms, and insurance companies as subsidiaries). The subsidiaries, in turn, are regulated by separate bank, securities, and insurance regulatory and supervisory authorities. However, the courts now determine what is a banking, securities, or insurance product when disputes about this issue arise among these separate authorities. Under Article 38 of the 1995 Commercial Banking Law, a commercial bank should decide the interest rates of loans it extends in accordance with the upper and lower limits of loan interest set by the PBC. Recommendation. The PRC has in recent years established separate bank (CBRC in 2003), securities (CSRC in 1992), and insurance (CIRC in 1998) regulatory and supervisory authorities. This is also the approach taken in other countries. There is no compelling reason or available empirical evidence to recommend any change in the scope of bank regulation and supervision at this time. As discussed more fully elsewhere in this report, however, it is recommended that the issue of financial conglomerates be addressed. Also, more information should be provided about the way in which co-operation and co-ordination will be arranged among these three financial regulatory and supervisory authorities, especially as regards jurisdictional issues that may arise with respect to new financial products and services. On the question of rate-setting policies, it is advisable to phase out the use of direct interestrate controls as an instrument of monetary policy, as the central bank increasingly relies on indirect instruments of monetary control, such as open market operations and discount policies. The rates a bank charges should be based on its own risk-assessment process, against its judgement of commercial opportunity. (c) Independence and Accountability Discussion. Independence of the bank regulatory and supervisory authorities, both from the government and the banking industry, is extremely important. Indeed, the Basel Committees 1997 Core Principles for Effective Banking Supervision (BCP) lists as its first principle that these
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authorities should possess operational independence.26 The government, of course, should set and define the goals for the banking authority and then hold them accountable for achieving them. But the more detailed way in which the goals are achieved should generally be left to the bank regulatory and supervisory authorities. In short, these authorities should largely determine the specific regulations and supervisory practices that promote a safe and sound banking industry within the confines of the law. The basic argument in support of independence is based upon the lessons learned from recent episodes of financial crises in various countries. It is argued by many banking experts that in countries like South Korea, Indonesia, Japan, Turkey and Venezuela the lack of sufficient independence from political influence was a major contributor to their crises. It is hard, moreover, to hold bank regulatory and supervisory authorities accountable for their actions when they lack independence. As regards what countries actually do, Appendix A, Table 3 presents several dimensions of independence and accountability, including appointment and removal, term of appointment, and liability for actions, for 18 countries. Clearly, there is no unanimity among the countries for any of these specific dimensions. However, in a recent IMF Working Paper, Marc Quintyn and Michael W. Taylor find that using four dimensions of independence and the nine criteria for accountability, arrangements in Australia, Belgium, Bolivia, Columbia, the United Kingdom and the U.S. come close to the ideal model.27 Recommendation. It is recommended that the PRC identify clearly in the law the powers and functions of CBRC within the broader context of specifying its assigned goals to be sure it has sufficient independence to fulfill its responsibilities and is appropriately held accountable for its actions. This is especially important in view of the PRCs commitments in the area of financial services under the WTO. predictability in the banking sector. This would also result in greater transparency and
26
The IMF and World Bank have recently conducted BCP compliance assessments of 60 countries as of year-end 2001. It was
found that only five countries were assessed as fully compliant with the 25 core principles. See Appendix A, Table 2 for more information on compliance for these countries for each of the principles.
27
See Marc Quintyn and Michael W. Taylor, Regulatory and Supervisory Independence and Financial Stability, IMF Working
Paper, March 2002, p.35.
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2. Entry into Banking Discussion. Entry into banking encompasses the granting of licenses and the initial capital required to obtain a license, among other factors.28 In many but not all countries around the globe the banking regulatory and supervisory authorities grant such licenses (see Appendix A, Table 3). Many argue that it is most appropriate for the bank authorities to issue licenses given their duties and expertise. It is further argued that this would let a bank know who is in charge at the outset. A related issue concerns Article 33 of the Regulations of the Peoples Republic of China on Administration of Foreign-Funded Financial Institutions. Under this Article, a foreign-funded financial institution is required, before taking any of a list of enumerated actions, to obtain the approval of the PBC and to go through relevant formalities for registration with the administrative department for industry and commerce. Registration with another agency after obtaining approval from the PBC seems timely, costly, and hence unnecessary. Multiple layers of bureaucracy should be avoided wherever possible. As regards other factors, as Appendix A, Table 4 shows, the initial-capital requirements, allowable sources of capital, and information required do in some cases differ across the 18 countries. Most countries, however, do require the same type of information before a banking license is granted or denied. The major differences across countries are with respect to the initialcapital requirements and the allowable sources of capital. Yet, even in this case, the most important differences arise in the case of capital requirements. nationwide, as compared to the other countries in the table. 29 the PRC, for instance, has
relatively high initial-capital requirements for commercial banks, especially those operating Of course, initial-capital
requirements are prudent to deter excessive risk-taking and thus destructively competitive behavior by new banks. The issue that arises, however, is what initial-capital requirement for entry into banking is prudent in the sense of promoting safe and sound banks and overall stability in the banking industry versus imprudent in the sense of protecting the already
28
The revoking of a banking license, and more generally, insolvency is also extremely important and will be treated later in the
report.
29
The issue of initial-capital requirements for foreign banks entering the PRC is addressed elsewhere in the report.
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established domestic banks from competition from still other domestic banks, and especially foreign banks.30 Unfortunately, the current precarious financial condition of the four SOBs in the PRC affects all decisions regarding the banking industry.31 This undoubtedly even applies to those regarding initial-capital requirements. The issue that nonetheless remains is whether the initialcapital requirements are currently structured so as to protect the big four SOBs from competition that would jeopardize the stability of the banking industry or to avoid dealing with the SOBs at the present time. Recommendation. Based upon a thorough review of mandatory and discretionary
conditions and procedures for establishing a commercial bank, several laws and regulations were found to be quite vague. In particular, it is recommended that the following issues be addressed: The laws and regulations do not clarify whether the sources of funds to be used as capital should be verified by authorities. The Commercial Banking Law [Article 12] clearly provides that community-need and competitive effects should be considered in approving an application for setting up a commercial bank. Although the banking laws of many other countries have the same
requirement, it seems that such a restriction may be used as a barrier to entry, especially with respect to foreign bank entry. Since the Commercial Banking Law [Article 15(5)] only requires an applicant to submit the credentials of the shareholders holding more than 10 percent of registered capital, it is
30
The WTO General Agreement on Trade in Services (GATS) and its Annex on Financial Services, which took effect in 1999,
allows WTO members to take regulatory measures that may limit cross-border trade in financial services if such measures are taken for prudential reasons. However, Kern Alexander argues that the ambiguities surrounding the interpretation of the concept of prudential regulation and its scope of coverage in the prudential carve-out of the Financial Services Annex will likely result in many trade disputes regarding the validity of prudential measures taken by members (see The World Trade Organization and Financial Stability: The Need to Resolve Tension Between Liberalization and Prudential Regulation, Working Paper No.5, Cambridge University, September 2002).
31
In this regard, it should be noted that approximately three fourths of total household deposits are in the four SOBs (see
Appendix A, Table 1). Without the current capital controls it would be legal to convert these deposits denominated in yuan into assets that are denominated in foreign currencies. A loosening of capital controls at the present time could create further difficulties for the SOBs if substantial deposits were withdrawn.
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unclear whether the licensing authority conducts a qualification check on other shareholders. Nor it is clear whether law enforcement authorities should be consulted when making qualification checks. There are several weaknesses in the approval procedures for setting up a commercial bank. If the licensing authority decides to refuse an application, the law does not require it to give the applicant notice in writing of its intention to do so, stating the refusal grounds and details of its right to make written representations to it within a specified period. The law is silent on whether the licensing authority shall revoke a license if it appears that the approved bank has not fulfilled or no longer fulfills one or more of the entry conditions. Under Article 20 of the Regulations of the Peoples Republic of China on Administration of Foreign-Funded Financial Institutions, to conduct yuan business, a foreign-funded financial institution is required to have been making profits for the two consecutive years prior to the application. Yet, the exact amount of profits is not specified. It appears, moreover, that the ability to consolidate profits and losses for all operations in the PRC is not allowed. There appears to be no prudential basis for these requirements as currently structured. The PBC issued several rules and circulars with respect to a commercial banks branching and sub-branching, including (1) Circular on Further Standardizing the Administration of Entry of Branches and Sub-branches of Joint-Stock Commercial Banks (June 2001); (2) Measures for the Administration of Establishment of Operational Networks in the Same City by Commercial Banks (February 2002); (3) Circular on Several Issues relating to the Administration of Market Entry of Chinese-funded Commercial Banks (April 2002); (4) Circular on Amending the Approving System for Establishment of New Branches by JointStock Commercial Banks (September 2002). Under these rules and practices, branching and sub-branching are restricted based on the amount of deposits and GDP of a proposed location, prudential measures, and sometimes on profit and asset requirements. In principle, the PBC will no longer accept a commercial banks application for setting up an institution junior to a sub-branch. There is some doubt as to whether these rules are in conflict with Article 19 of the Commercial Banking Law, which provides that a commercial bank may, subject to the approval of the PBC, set up its branches and sub-branches within the PRC and abroad based on its business needs.
This Article does not authorize the PBC to impose additional

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conditions (except prudential conditions) in approving branching and sub-branching. Branching and sub-branching decisions should be based purely on commercial considerations. If a commercial bank meets prudential requirements and, if necessary, community needs, the PBC should consider not imposing any further restrictions in terms of location and form of branching and sub-branching. The same can be said for overseas expansion, where the new branch or subsidiary must comply with host-market regulation, while still submitting to CBRC review. More generally, there is a current relative shortage of skilled accountants, lawyers and market-oriented bank managers in the banking industry. This together with the weak financial condition of the big four SOBs, raises questions about the existing entry-into-banking requirements, as discussed elsewhere in the regard. The recommendation here is that the PRC evaluate the practices of other countries and provide an explanation as to why its current entry requirements are based on prudential considerations, rather than on a desire to avoid dealing with the SOBs at the present time.
3. Ownership Structure Discussion. The ownership structure that is allowed in the banking industry is important because it may give rise to the existence of conflicts of interest that could undermine the financial soundness of banks. A family, for example, that owns both a bank and a non-bank firm may direct the bank to make a loan to an affiliated firm on terms unfavorable to the bank as compared to nonaffiliated firms. More generally, when banks and non-bank firms are affiliated under the ownership or control of a single entity the affiliated firms may be induced to engage in transactions with one another on terms which would never occur if they were not jointly controlled or owned. It therefore becomes incumbent upon the governmental authorities to recognize such potential conflicts of interest and to take appropriate action to monitor and control them before they inappropriately increase the risk exposure of banks. This does not mean, of course, that all affiliations of banks and non-banks should be prohibited. As Appendix A, Table 5 indicates, almost all of the 18 countries allow for the ownership of banks by individuals, families, non-bank financial firms, and non-financial firms. (The U.S., interestingly enough, allows Bill Gates to own a bank but not in addition to Microsoft). All the countries that allow substantial degrees of freedom with respect to the structure of bank ownership, however, must establish
prudential rules and regulations to prevent undue risk being borne by banks. Some countries do so in part by requiring prior authorization or approval or by placing ownership limits on the percentage of a banks capital or shares that may be owned (see Appendix A, Table 5). Recommendation. The PRC already has relatively unlimited ownership of banks by nonbank financial firms and non-financial firms. The existence of these financial conglomerates results from the fact that there is no law prohibiting such ownership structures. And the policy of the government as stated in various meetings has been to approve these types of firms on a caseby-case basis. It is recommended that the current situation regarding these conglomerates be changed as discussed in Section VI, below. In general, the private ownership of banks should also be encouraged.
4. Scope of Activities Discussion. The scope of activities of banks refers to their ability to engage in securities, insurance, and real estate activities and the extent to which banks can own shares in non-financial firms. It is essentially the scope of activities that defines what is meant by the term bank. Some argue that banks should be restricted to a fairly narrow range of activities that would exclude securities, insurance and real estate. The reasons usually given are that banks lack sufficient expertise in these other areas and that conflicts of interest will arise if banks offer these other products. It is argued, for example, that a bank may be less than objective when promoting the sale of securities of firms to which it has outstanding loans. Others argue, however, that by allowing banks to engage in a broader range of activities they can benefit from economies of scope and from an overall reduction in risk through diversification. Whether based upon an assessment these types of arguments or not, countries have made decisions on the allowable scope of activities for banks. And Appendix A, Table 6 shows the substantial variation that exists among 18 countries. Most of these countries require more than one license when banks broaden their scope of activities beyond banking, and then usually when the additional activities must be conducted in separately capitalized subsidiaries or affiliates. With respect to specific activities, every country except the PRC and South Korea allow banks to underwrite, deal and broker securities. However, some countries require that all or some of these activities be conducted in separately capitalized subsidiaries of banks, which is consistent with attempting to control potential conflicts of interest. The U.S. goes even beyond this by requiring
that the full range of these activities be conducted in affiliates that are subsidiaries of a financial holding company. Many other countries simply allow all these securities activities to be
conducted directly in the bank. In addition to the PRC and South Korea, however, Australia and Germany do not allow banks to engage in mutual fund activities. Of the 18 countries, ten do not allow banks to underwrite insurance. But all ten, except Russia, allow them to sell insurance. Yet, even when these activities are allowed, only Germany, Italy and South Africa permit them to be conducted directly in banks. Other countries require that such activities be conducted in subsidiaries. The most restricted activity is real estate among the 18 countries. Once again, however, there is substantial variation. Several countries prohibit real estate investment, development and management, whereas others allow all these activities. All except one of the countries that permit all three types of real estate activities, moreover, allow the activities to be conducted directly in banks. Of the 18 countries, all except the PRC and the U.S. allow banks to own shares in nonfinancial firms. Even in the case of U.S., however, banks are allowed very limited ownership so long as it is strictly passive (i.e., no control can be exercised). But countries allowing such ownership typically place a limitation that is tied to a banks capital. This type of limitation is meant to prevent the bankruptcy of a firm in which a bank owns shares from forcing the bank itself into bankruptcy or insolvency. Recommendation. There is no basis for recommending that the PRC make any changes with respect to the scope of bank activities at the present time. Once the problems of the big four SOBs are resolved, however, it is recommended that consideration be given to allowing banks more discretion to engage in a broader range of securities activities as these markets develop and to own shares in non-financial firms. In this case, various limitations should also be considered, such as requiring that these additional activities be conducted in separately capitalized subsidiaries or that ownership of shares in non-financial firms be limited if not passive. Depending on how financial conglomerates are treated, however, this may not be issue for the near future. Yet, over the longer term, it is recommended that the PRC consider allowing a bank to broaden its financial activities without becoming part of a financial conglomerate.
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5. Capital Requirements Discussion. Capital requirements are critically important for containing and controlling the risk behavior of banks. Indeed, they are the first pillar of the New Basel Capital Accord. Such requirements may be likened to the deductible that is frequently included in an insurance policy. The greater the portion of the loss that is first borne by a policyholder the greater the incentive of the insured to take action to minimize the likelihood that an insurance claim will be filed. This analogy also applies to banking. When the owners of a bank are required to put their own capital at risk they have an incentive to prevent the bank from engaging in excessively risky activities. Capital requirements, of course, must not be set so high as to prevent the prudential expansion in the overall size and range of the activities of banks. Unfortunately, there is no universally agreed upon level and composition of capital that is deemed to be best from a prudential standpoint for each and every bank in each and every country of the world at any one time, yet alone over time. Nor is there a universally agreed upon best way in which to measure capital when determining the required amount. Not surprisingly, therefore, accounting rules and their interpretations as well as the valuation methods used to calculate capital vary both within and across countries. As Appendix A, Table 7 shows, there is relatively little variation among the 18 countries with respect to the minimum capital-to-asset ratio requirement. Most simply adopt the minimum risk-based capital requirement of 8 percent as specified by the 1988 Basel Capital Accord. There is more variation, however, with respect to the specific components of capital that satisfy this requirement. Despite this variation among countries, it is widely agreed by banking experts everywhere that prudential capital requirements are the first line of defense in inducing banks to avoid engaging in excessively risky activities. Operationalizing the word prudential in this regard is quite difficult as evidenced by the current controversy over the new capital requirements planned by the Basel Committee on Banking Supervision. Part of the controversy, moreover, centers on the potential for inconsistency in standards and approaches across countries in areas where national discretion is available. Recommendation. The Commercial Banking Law provides that capital adequacy of a commercial bank be not less than 8 percent. In December 1996, the PBC issued the Circular on the Controlling and Monitoring Indices and the Examination Methods for the Administration of
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Assets and Liabilities Ratios of Commercial Banks. This Circular is quite similar to the 1988 Basel Capital Accord. Yet, it is widely agreed that this approach to capital adequacy is
significantly flawed. In this regard, it is recommended that the PRC address the following issues: Insofar as the capital adequacy regulation is based on the 1988 Basel Capital Accord, it shares the same flaws as the Accord. These are as follows. First, capital is valued on a historical book-value basis rather than a market-value basis. Second, it uses rather arbitrary (i.e., not necessarily related to market-based factors) measures of a banks on- and offbalance-sheet risks. Third, the effect on overall risk when combining different assets into a portfolio is ignored. In theory, the overall risk in a balance sheet is determined not only by the characteristics of the individual assets, but by the way in which they interact with one another when combined. Fourth, the capital adequacy regulation only considers credit risk. Interest rate risk, market risk and operational risk are ignored. Fifth, the current risk-based capital adequacy regulation encourages the creation of regulatory capital arbitrage in which a bank may increase overall risk while its required capital ratio does not correspondingly increase. Under the Circular above, supplementary capital comprises doubtful-debt provisions, baddebt provisions, reserves for investment risks, and long-term bonds with a maturity of five years or more. Yet, the definitions of doubtful debt provisions and bad debt provisions are unclear. According to the Guidelines on Provisioning for Bank Loan Losses issued by the PBC in April 2002, only general provisions can qualify for inclusion in supplementary capital. The relation between doubtful debt provisions, bad debt provisions and general provisions therefore should be clarified. As the depth and sophistication of financial markets increase, regulators often show little ability to keep up with new developments. institutions. 32 As a result, regulators find it difficult to
formulate precise rules to regulate the increasingly sophisticated activities of financial By contrast, some internationally active banks have developed their own
models to track and evaluate various risks on a quantitative basis. This enables them to set limits on risk-taking, evaluate the return and risks of specific activities, and allocate capital
32
William J. McDonough, Conference Overview: Major Themes and Directions for the Future, Federal Reserve Bank of New
York Economic Policy Review, October 1998, p.5.
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accordingly. It is expected that in the future capital regulations will be based less on specific rules and prescriptions and more on a system of general principles for sound and prudent management.33 A uniform regulatory risk-based capital ratio may not correctly measure the risk levels reflecting a banks likely exposure to losses and thus the required capital will not reflect accurately a banks prudential cushion against those losses. It might be preferable to adopt forward-looking legislation that grant banks the freedom to use their internal models to calculate capital charges as long as they also stand ready to absorb or suffer the losses if their calculations prove to be wrong. Currently, no laws or regulations explicitly empower or require the bank regulator to take prompt corrective action when a bank is experiencing difficulties. Under the prompt corrective action arrangement, if a banks capital ratio falls below the minimum level, the bank regulator takes action to ensure that the bank has a realistic plan to restore the minimum in a timely fashion. Failure to submit and implement an
acceptable capital restoration plan results in the imposition of corrective measures, such as requiring re-capitalization, restricting transactions and asset growth, more frequent and detailed examinations and even forced closure. Since PBC officials have indicted that prompt corrective action will be adopted in the future, it should be so stipulated at the level of a law or regulation insofar as no law or regulation has so far authorized the bank regulator to close a commercial bank due to under-capitalization. The exception is the Regulations on Financial Institution Closure, under which a financial institution may be closed in the event that it is operating in violation of law or regulation and is mismanaged and its continuance would seriously damage the financial order and the public interest. When the regulators prompt corrective action is created below the level of regulation, the regulator may be required to demonstrate to the court that under-capitalization would seriously damage the financial order and the public interest if the regulator incurs a lawsuit arising from an attempt to close an undercapitalized bank. More specifically, as regards the New Basel Capital Accord, it is recommended it not be adopted by the PRC or other emerging market countries given its overly detailed, complex and prescriptive approach to capital levels.
33
McDonough, supra note 2, at pg. 5.
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6. External Auditing Requirements and Examinations Discussion. governance. Both internal and independent external audits are part of sound bank When an independent, external auditor conducts an audit in accordance with
appropriate standards, the auditors opinion lends credibility to a banks financial statements. This, in turn, assists in promoting confidence in the banking industry. Examinations of banks by the regulatory and supervisory authority are also part of sound bank governance, although they look more broadly on the safety and soundness of a bank and the overall stability of the banking system. In doing so, of course, the bank authorities use the financial statements of banks. It is in this way that audits and examinations complement one another. However, financial statements are typically made public, whereas examination reports are not. Appendix A, Table 8 shows that all 18 countries except the PRC and Taipei, China require an external audit for banks as well as specify the extent or nature of it. 34 In every country, moreover, the bank supervisory authorities receive a copy of the auditors report and in every country except Japan the authorities have the right to meet without the approval of the bank to discuss it. There are more differences among the countries, however, as to whether auditors are required by law to directly communicate with the bank authorities about presumed illegal activities or whether the authorities can take legal action against auditors for negligence. In the case of infractions of any prudential regulations that are found by a bank supervisor, all the countries require that they be reported. The countries differ, however, as to whether mandatory actions are required to be taken in such cases. As regards the PRC specifically, under the Commercial Banking Law, the bank regulator has power to conduct examinations of commercial banks at any time (Article 62) and commercial banks are required to submit to the bank regulator the balance sheet, profit and loss statement, and other financial and accounting statements and documents on a regular basis (Article 61). In 1996, the PBC issued the On-Site Examination Procedures of the PBC, the PBC On-site Examination Manual, the Standard Report Forms for the PBC On-site Examination and the PBC Preexamination Questionnaire. Under these documents, the composite CAMEL rating of a bank is
34
It might be noted that countries like India, Italy, South Korea and Singapore require that banks change external auditors
periodically.
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calculated based upon an unweighted, straight arithmetic average of the component ratings, ignoring the factors that bear significantly on the overall condition and soundness of a bank. Such a simple, mechanical approach may not necessarily reflect the extent of supervisory oversight of the bank that the circumstances demand. For example, a composite rating of 3 might be
appropriate for a bank with a large volume of adversely classified assets, notwithstanding the fact that better numerical assessments were assigned to a majority of the other CAMEL elements. It seems that the PRC has not issued any regulation or rule on external auditing of commercial banks, except for listed banks, which are subject to securities legislation. Although the Commercial Banking Law (Article 63) provides that commercial banks should accept the surveillance of auditing authorities, this is not the same as external auditing from a prudential regulation perspective. It may be necessary to establish some rules on external auditing of commercial banks according to the Basel Committees guidance on the Relationship between Bank Supervisors and External Auditors, dealing with external auditor qualifications and appointment, auditing obligations, reporting duty to the bank regulator, confidentiality duty and other related matters. Recommendation. It is recommended that the Commercial Banking Law require an
independent external audit to be conducted on all banks and that the role of external auditors be clarified as a complement to banking supervisors in examining loan classification and provisioning policies of banks. However, consideration should be given to waiving the external audit requirement for relatively small banks. It is further recommended that the licensing or certification requirements for auditors be sufficiently stringent to assure that only adequately trained and appropriately skilled individuals are able to be licensed or certified. In many countries, external auditors are legally required to examine loan portfolios and to ascertain the adequacy of provisions established by banks for impaired assets, including loans. Also, it is recommended that the PRC consider providing the bank authorities with the power to hold external auditors responsible and accountable for negligence. Lastly, it is recommended that the CAMEL rating of banks be reassessed and that external auditing rules be established as discussed above.
7. Liquidity and Diversification Requirements Discussion. Banks are important for both the payment mechanism and credit system in countries around the world. In many countries, moreover, they dominate the financial sector,
especially in developing countries where stock and bond markets are understandably yet to be very developed. To better promote safe and sound banks and a stable banking industry, most countries require banks to maintain some minimum degree of liquidity and diversification. Liquidity enables a bank to better cope with unexpected deposit withdrawals, while asset diversification better enables banks to reduce credit quality problems. Diversification can be achieved, moreover, through lending abroad. Similarly, liquidity can be achieved through holding some foreign-denominated assets when some liabilities are so denominated. Appendix A, Table 9 shows that some countries do indeed impose liquidity and diversification requirements. Of the 18 countries represented, 14 have liquidity requirements. Most of the countries imposing them, moreover, pay interest on the liquidity reserves. Only one country of the 18 countries, however, requires banks to hold reserves in foreign-denominated currency or instruments. The table also indicates that only the PRC, South Korea, and Taipei, China either restrict or prohibit banks from making loans abroad. Lastly, in 9 of the countries there are explicit, verifiable, and quantifiable guidelines regarding asset diversification, including large exposure or lending limits. Recommendation. It is recommended that the PRC establish explicit, verifiable, and
quantifiable guidelines regarding asset diversification. This could be done along the lines of other countries already doing so, as indicated in Appendix A, Table 9. The specific issue of asset concentration is addressed below in sub-section 11. It is also recommended that the PRC relax the restrictions on the making of loans abroad once the broader issues of capital controls and the weak financial condition of the four SOBs are resolved. Given that the PRC already has liquidity requirements, it is simply recommended that they be maintained.35
8. Provisioning Requirements Discussion. Regulations or rules on loan classification and provisioning vary across countries. In some countries, the rules are developed by private sector accounting standard-setting bodies while in others the rules are issued by Parliament, the Ministry of Finance, or the banking
35
These requirements were recently raised to curb the rapid expansion in bank credit in the first half of 2003. It is not clear
whether this growth was imprudent and thus represents serious deficiencies in bank supervisory practices apart from the liquidity requirements.
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regulator. According to a World Bank survey of loan classification and provisioning practices in 2001 (hereinafter, World Bank Survey of Provisioning), in 6 out of G-10 countries the supervisory agency has the authority to issue a prudential regulation on loan classification.36 There are different approaches to loan classification. In some countries (e.g., Germany), banking regulators are responsible for classifying loans, while in countries with no detailed regulatory classification regime, loan classification is left to bank management through developing necessary internal policies and procedures. In some countries, supervisors do not require banks to adopt any particular form of loan classification, but expect banks to have proper risk management procedures with respect to the prudential appraisal of loans (e.g., UK) or periodically review a banks own groupings of loans (e.g., the Netherlands). Although a banks internal policy may be emphasized, some countries have opted for a more prescriptive approach. Under such an approach loans are classified into categories ranging from three to nine. In many loan classification regimes the term non-performing loan is widely used but with different meanings. In Appendix A, Table 10, 14 out of 18 countries have a formal definition of a non-performing loan. According to another survey, about 60 countries use payment in arrears as a criterion in defining a non-performing loan.37 Loan classification may be based on the number of days a loan is in arrears, a forward-looking estimate of the probability of default, or both. Appendix A, Table 10 shows that all three approaches are used in the 18 countries surveyed. As a matter of fact, the PRC also uses the number of days of past due payments as a supplement to the forward-looking approach (Article 9, the Guiding Principles for Loan Risk Classifications). According to Table 10 and the above-mentioned survey, the number of days a loan is in arrears varies greatly across countries with respect to defining a sub-standard, doubtful and loss loan. The main purpose of loan-loss provisions is to recognize potential future calls on a banks capital resources and to make due allowance for them. Since experience demonstrates that under-
36
World Bank Bank Loan Classification and Provisioning Practices in Selected Developed and Emerging Countries June 2002,
p.32.
37
See Barth, James R., Gerard Caprio, and Ross Levine (2001). The Regulation and Supervision of Banks Around the World: A
New Database, in Robert E. Litan and Richard Herring, editors, Integrating Emerging Market Countries into the Global
Financial System, Brookings-Wharton Papers on Financial Services, Washington, D.C.: Brookings Institution Press.
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provisioning poses a serious threat to financial stability, loan loss provisioning has received much attention from banking supervisors. Some countries provide principle-based rules with the
responsibility for assessing the quality of assets and for determining an appropriate level of provisions resting in the first place with bank management. This is common in the European countries (Table 10). By contrast, in some countries there exists a mandatory, usually minimum, provisioning level that varies according to the loan category (Table 10). The rationale for this is to level the playing field and make bank regulations more easily enforceable. In theory, a risk-based loan classification scheme may require other loans to the same borrower to be automatically re-classified if one loan to the borrower is classified as nonperforming. In practice, however, there are different classification methods for multiple loans as Table 10 indicates. One method is based on other loans to the same borrower being reclassified into the same or a different category. The other approach is based on leaving the decision to the discretion of banks themselves on a loan-by-loan basis. As regards tax treatment of loan provisions, there are three approaches. First, under the write-off approach, loans are tax-deductible only when they are declared uncollectable and are written off the banks books. Second, under the specific provisions approach, specific provisions are fully or partly tax-deductible. Third, under the general provisional approach, banks can take a deduction for general provisions up to a predefined percentage of eligible loans.38 As Appendix A, Table 10 shows, most of the countries surveyed adopt the specific provisions approach. Table 10 shows that in most of the countries surveyed inaccurate classification of loans or underestimation of provisions carry penalties. However, most jurisdictions lack specific sanctions for such breaches of loan classification and provisioning regulations. In a survey conducted by the Word Bank, only 5 out of 23 jurisdictions have targeted penalties which specifically address classification and provisioning failures, 16 adopt a general penalties approach that addresses any misleading information in banking law or corporate law, and 2 impose no penalties.39 However, whether a general penalties approach or targeted penalties approach is used, the penalties normally include fines, dismissal of managers, and imprisonment. Apart from these penalties,
38
Word Bank, Bank Loan Classification and Provisioning Practices in Selected Developed and Emerging Countries, June,
2002, p.32.
39
Id. p. 31.
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supervisors may also issue reprimands, enforce corrective action (including ordering a bank to constitute provisions to cover losses), increase the required regulatory capital, suspend or revoke a banking license, among other actions. Focusing directly on the PRC, according to the Commercial Banking Law [Article 57], commercial banks shall set aside bad debt provisions and write off bad debts in accordance with the relevant regulations of the state. In December 2001, the PBC issued the Guiding Principles for Loan Risk Classifications. Under these Guiding Principles, loans are classified, based on their risk levels, into five categories: standard, mentioned, sub-standard, doubtful and loss, with last three categories being non-performing loans. As far as these Principles per se are concerned, they are consistent with international practices. The issue that arises is how to apply these Principles in practice. In addition, the current Principles in the PRC ignore the role played by external auditors and by supervisors in helping ensure that a bank has an adequate system of loan classification and provisioning. Recommendation. The Guiding Principles for Loan Risk Classifications and the Guidelines on Provisioning for Bank Loan Losses are, to a great degree, in line with current international trends. However, given the complexity of the loan classification and provisioning policies, there is as yet no international consensus with respect to definitions, standards, classification technique, level of provisioning and other related issues in this area. Perhaps the most important task for the PRC banking regulator in the future is to focus on how to implement rather than revise the rules and principles. For this purpose, the banking regulator should regularly review banks provisioning policies, ensuring that management adopts a prudential approach to making provisions and that this approach is followed consistently. The banking regulator should be satisfied that the quality of a banks loan review system is adequate and appropriate information about the credit quality of the loan portfolio is provided to the board of directors and senior management on a regular and timely basis. If the banking regulator determines that provisioning is not satisfactory, it should take action to improve the provisioning management at the problem bank. For such action to be mandatory, it is recommended that the banking law should provide for the corrective actions available to the banking regulator. Such actions involve consultation with bank management, moral suasion, issuance of reprimands, imposition of fines, dismissal of managers, ordering a bank to constitute provisions to cover actual or potential losses, increasing the required regulatory capital, and suspending or revoking the banking license.
9. Accounting and Information Disclosure Requirements Discussion. Banks are by their very nature relatively opaque institutions. They make a wide variety of loans whose terms and conditions are tailored to the needs to their customers. These loans are therefore typically quite illiquid and difficult for outsiders to value. At the same time, however, it is important for the public, which entrusts its funds to banks, and the bank regulatory and supervisory authorities to assess the financial condition of banks. It is for this reason that the type of accounting technique employed and the type of information disclosed are essential in promoting prudent banking practices and thus safe and sound banks. Appendix A, Table 11 presents selected types of accounting and information disclosure requirements that are being used to promote prudent banking practices. All 18 countries require banks to produce consolidated financial statements, including non-bank financial subsidiaries. India was the most recent (March 2003) to do so of the 18 countries in the table. Consolidated accounting is important and appropriate to prevent double-gearing (i.e., the dual or multiple use of the same capital in several members of a financial conglomerate, or where the parent company finances its capital subscription to a supervised subsidiary by issuing debt) by financial institutions. These countries differ, however, with respect to the treatment of accrued, though unpaid, interest or principal entering the income statement. In all 17 countries it enters the income statement while the loan is performing. But when the loan is non-performing, accrued, though unpaid, interest or principal enters the income statement in only 3 countries (and in some cases in Italy). In 11 countries it does not, though the length of time the interest or principal is in arrears before this happens extends to one year in the case of a secured loan in Hong Kong, SAR, China. As regards the disclosure of information, in all 18 countries off-balance sheet items are disclosed to both bank supervisors and the public. In 5 of these countries, however, it is not required that the risk management procedures of banks be disclosed to the public. Importantly, in all the countries bank directors are held legally liable if the information disclosed is erroneous or misleading, with penalties to be levied and actual enforcement having occurred in many of the countries. None of the countries require that credit ratings be obtained by banks, although banks themselves have an incentive to do so and the bigger ones typically do in many countries.
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One must be somewhat cautious about all international comparisons of financial statements. The reason is that countries do not use the same accounting standards, as may be seen in Appendix A, Table 11. Even among the 18 countries there significant differences with respect to the use of International Accounting Standards and U.S. Generally Accounting Accepted Accounting Principles. Unless one is familiar with the different accounting standards used in countries and can reconcile their differences, it is very difficult to accurately compare the condition of banks in different countries. The problem is compounded when corruption, fraud, or political influence further distorts the reported financial statements. Recommendation. It is recommended that the PRC adopt accounting practices that are in accordance with IAS. Admittedly, the current weak financial condition of the big four SOBs would undoubtedly render them insolvent if this were done immediately. Yet, it is important that one be able to more accurately and reliably assess the financial condition of banks in the PRC, especially as it completely fulfills its commitments to the WTO in 2006. The PRC could phase in a move to IAS over an announced limited period of time. Even during such a transition period, more frequent and detailed accounts than currently required in Articles 55 and 56 of the Commercial Banking Law would accelerate internal improvements, as would the establishment of some kind of public ratings system.
10. Discipline and Problem Institutions Insolvency Discussion. The third pillar of the New Basel Capital Accord focuses on discipline. It is very important that banks behaving imprudently be appropriately disciplined. To do so, of course, requires that the bank regulatory and supervisory authorities be granted the requisite powers. Laws, rules, regulations and practices are necessary but not sufficient to contain excessive risktaking behavior by banks. The banking authorities must be able to enforce them. Indeed, a law may even be appropriate that forces the authorities to take specific actions (like intervention) based upon pre-determined levels of solvency deterioration, as already discussed above. Once the condition of a bank deteriorates so badly that it becomes a serious problem or is actually insolvent it becomes incumbent upon the relevant authority to take decisive and timely action to minimize the eventual costs of any failures or resolutions. The issue is then which governmental entity will be in charge and what powers does it possess. More specially, will the banking authority, courts, or some other entity be in charge? There appear to be no agreed
reasons to favor one approach over another. Regardless of which entity is in charge, however, the banking authorities will necessarily be involved in dealing with problem and insolvent banks.40 Appendix A, Table 12 shows what 18 countries actually do with respect to disciplining and responding to problem and insolvent banks. There not a single area covered by the table in which all the countries act the same. The closest there is to unanimity is in the case of whether court approval is required for supervisory actions, such as superceding shareholder rights, removing and replacing management, removing and replacing directors, or license revocation. countries only South Africa requires court approval. In all the other areas there is substantially less uniformity among the countries. In 9 countries infractions of cease-and-desist-type orders lead to the imposition of civil and penal sanctions on bank directors and managers, while in the other 9 countries they do not. In 9 countries, banking authorities are required to make formal enforcement actions public, while in the other 10 countries they are not required to do so. Of the 18 countries, the courts can legally declare a bank to be insolvent in 8 of them and a court order is required to appoint a receiver or liquidator in the event of a liquidation in 9 of them. In 9 of the countries, moreover, bank shareholders can appeal to the courts against decisions of the banking authorities. Courts clearly play an important role in the banking industries of many countries. Lastly, as regards the existence of a law that establishes predetermined levels of solvency deterioration which force automatic actions (such as intervention) or what is referred to as prompt corrective action (PCA), 6 countries among the 18 countries in the table have such a law. Recommendation. As discussed below, in Section VIII (Bank Insolvencies), the PRC should concentrate disciplinary powers within CBRC, while assigning the judiciary with the role of review. It should be noted that in meetings in Beijing and Shanghai it was recommended by various individuals that the laws and regulations and rules in these areas should be more transparent and that there should be a clearer line of demarcation between the powers of the court and the banking authority, and there was some preference for granting more power to the banking authority. It is recommended that this be done and that it is appropriate to include a prompt
40
Of the 18
The PRCs first major bankruptcy of a financial institution - the Guandong International Trust and Investment Corporation
(GITIC) - occurred in January 1999. It was declared bankrupt at a meeting of investors and a liquidation committee was established by the PBC (see http://www.wsws.org/articles/1999/jan1999).
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corrective action provision in the revised Commercial Banking Law. Furthermore, the revised Law should stipulate some of the personal, legal liabilities for fiduciary agents (directors and management) and supervisory authorities.
11. Risk Concentration Discussion. In any banking system, depositor protection and the stability of the banking system are closely linked to the quality of assets. Excessive concentration of risks is a welldocumented cause of bank failures. For this reason, supervisors often rely on a set of parameters to control risk concentration that can be expressed in the form of formal limits or guidelines and reporting thresholds to evaluate the extent and quality of management controls in this area and to assess the compliance with a banks diversification policies. For the purpose of diversifying risks, the Core Principles for Effective Banking Supervision provide that supervisors must set prudential limits to restrict bank exposures to single borrowers or groups of related borrowers. In most countries, the large exposure limits are generally
expressed in relation to a banks capital, with limits for single exposures generally falling within the range of 10 percent to 40 percent of total capital. Typically, 25 percent or 15 percent of capital is the most that a bank may extend to a borrower. According to the Basel Committee, anything less than 10 percent would not seem realistic in view of many banks present portfolios, whereas anything greater than 25 percent would be a relaxation of present supervisory constraints in most countries.41 Appendix A, Table 14 shows the range of limits in 18 countries. It should be noted that the denominator (i.e., capital) in the loan concentration limits is not always the same among countries. In most countries, it involves Tier 1 and Tier 2 capital as defined in the risk-based capital adequacy regulation. In Table 14, all countries except the U.S. use the same concept as defined in the capital adequacy regulation. The U.S. regulations adopt a broader concept, defining capital and surplus in the lending limits as: (a) the banks Tier 1 and Tier 2 capital included in the banks risk-based capital plus (b) the balance of the banks allowance for loan and lease losses, to the extent that the allowance is not already included in Tier 1 and Tier 2 capital for the purpose of determining the banks risk-based capital.42
41 42
Basel Committee on Banking Supervision, Measuring and Controlling Large Credit Exposures, January 1991, p.5. 12 C.F.R. Section 32.2(b).
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As Appendix A, Table 14 shows, there is a growing tendency for supervisors to look at risk concentrations in their totality (i.e., by considering all forms of risks included in the balance sheet as well as those arising from off-balance-sheet activity). The main problem that arises is the quantification of off-balance sheet exposures. One possible solution is to adopt the concessional weightings and conversion factors of the Basel Capital Accord. However, as the Basel Committee points out, since a large exposure measure is concerned with concentrations of risk, the measure of exposure needs to reflect the maximum possible loss from the failure of a single counterparty. Thus using the capital weights for measuring credit concentrations could significantly underestimate potential losses. It is suggested by the Basel Committee that the measure should include, at par value, credit substitutes and all other forms of contingent liabilities. It is often discovered that several large exposures are in practice related so that in effect they constitute a single exposure. Generally speaking, as Appendix A, Table 14 shows, related counter-parties are defined to mean those representing a single risk because they are legally or economically interrelated. For example, under article 1(25) of the Directive 2002/12/EC, a group of connected clients means: (1) two or more natural or legal persons who constitute a single risk because one of them, directly or indirectly, has control over the other or others, or (2) two or more natural or legal persons between whom there is no relationship of control above but who are to be regarded as constituting a single risk because they are so interconnected that, if one of them were to experience financial problems, the other or all of the others would be likely to encounter repayment difficulties. In many countries special attention is paid to connected lending within the framework of large exposure controls because it can lead to non-objective determinations of the creditworthiness of borrowers, to conflicts of interest, and in certain circumstances to dangerous leveraging within a group of companies and to corruptive practices. Connected lending is broadly defined to mean the extension of credit to a banks affiliates, insiders (i.e., directors, officers, employees and their families and friends) and bank shareholders. As Appendix A, Table 14 shows, connected lending is either forbidden or such lending is deducted from the capital of the lending bank. Some countries maintain the same limit as that on large exposures but require that the terms and conditions of such credit not be more favorable than credit extended to non-related borrowers under similar circumstances. One of the difficulties with connected lending is how to define connected lending and how to distinguish between connected lending and related counterINTERNATIONAL LAW INSTITUTE 62 15 DECEMBER 2003
party lending constituting a single risk. In most cases, connected lending is limited to directors, officers and employees at the bank. Yet, in the European Union (EU) it is defined as the parent undertaking or subsidiary of the credit institution or one or more subsidiaries of that parent undertaking. While a number of exposures may deserve exposure controls, some exposures undoubtedly deserve to be exempt from them. Appendix A, Table 14 shows most of the countries surveyed have large exposure exemptions, including exposures to governments, short-term exposures to bank counter-parties and exposures secured by collateral. Country and sectoral exposures are usually treated separately within the general framework of the policy on large exposures. Since precise definitions and judgments on country and sector risk degrees are difficult to make and heavily depend on the expertise of the bank and the size and stability of the sector or country concerned, it appears inappropriate for supervisors to specify strict official ceilings on the appropriate level of exposure to particular sectors or countries. Banks should be expected to set their own internal limits on country and sectoral exposures while supervisors should play a monitoring role. With regard to the PRC, the Commercial Banking Law [Article 39] provides that the ratio of the balance of loans to a single borrower and the banks capital shall not exceed 10 percent. However, legal arrangements for risk concentration controls in the PRC appear to have the following weaknesses: Under the Commercial Banking Law, exposure is only confined to loans. The Guidelines on Commercial Bank Implementing Uniform Credit-Granting System of 1999 expand exposure to on- and off-balance sheet items, but it is unclear whether the ratio of 10 percent applies to these Guidelines. There is not a definition of a single borrower. It is unclear whether two or more borrowers who constitute a single risk because one of them, directly or indirectly, has control over the other or others, or because they are so interconnected that, if one of them were to experience financial problems, the other or all of the others would be likely to encounter repayment difficulties, are treated as a single borrower.
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Country and sectoral exposures are usually treated separately within the general framework of the policy on large exposures. The Guidelines on Commercial Bank Implementing
Uniform Credit-Granting System of 1999 touch on the issue of regional exposure, but not on sectoral exposures. Since precise definitions and judgments on sectors and country risk exposures are difficult and depend much on the expertise of the bank and the size and stability of the sector or country concerned, it appears inappropriate for supervisors to specify official ceilings on the appropriate level of exposure to particular sectors or countries. Banks should be expected to set their own internal limits on country and sectoral exposures while supervisors play a monitoring role. In many countries large exposure regulations provide a number of exemptions from the large exposure limits depending on borrowers and types of transactions. It seems overly restrictive for the PRCs legal arrangements regarding large exposures to include all loans under the large exposure controls. Indeed, it is recommended that short-term exposures denominated in local currency, exposures to central governments and central banks of specified countries and exposures secured on cash or specified government securities be exempted from the large exposure limits. There are no limits on the aggregate of all large exposures. The Circular on the Controlling and Monitoring Indices and the Examination Methods for the Administration of Assets and Liabilities Ratios of Commercial Banks provides that the aggregate of loans to the top-ten borrowers shall not exceed 50 percent of capital. It may be also necessary to require a bank not to incur large single-borrower exposures, which exceed a certain percentage of its own capital. There is no mechanism for reporting large exposures and no threshold-reporting limits are established. Recommendation. A major defect with regard to large-exposure controls in the PRC It is therefore
Commercial Banking Law is that off-balance-sheet activity is excluded.
recommended that the PRC should include most off-balance sheet exposures, if not all, under large-exposure controls. At the same time, a number of exemptions from the large-exposure limits, such as short-term exposures denominated in local currency, exposures to central
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governments and central banks of specified countries and exposures secured on cash or specified government securities, should be introduced. It is also recommended that the concept of a single borrower should be defined and in some circumstances the banking regulator should be granted the authority to make discretionary judgments about the connections between the lending bank and its customers. A single-risk test should be adopted to define a single borrower. For connected lending, it is unnecessary to adopt more restrictive limits insofar as the 10 percent limit, which is currently adopted by the PRC is quite restrictive. However, an alternative to this may still make sense, which is to raise the large-exposure limit from 10 percent to 25 percent and keep the connected lending limit (10 percent) unchanged (or raise it to 15 percent). As to sectoral and country exposures, the banking regulator should focus attention on banks strict adherence to prudent policies, thereby ensuring that the specific dimension of sectoral and country exposures are adequately reflected in the overall assessment of the risk incurred by banks. In addition, the banking regulator monitors not only the individual banks own sectoral or country exposures, but also the overall risk exposure of the banking sector to certain sectors and countries. It is recommended that the PRC establish a mechanism for reporting large exposures, which involve a regular and an exceptional reporting system, and threshold reporting limits. The regular reporting system would require banks to report all large exposures at a reporting frequency laid down by law or regulation. If in an exceptional case, exposures exceed the limits, banks would then report to the banking regulator without delay. Threshold reporting limits (e.g., 10 percent of capital) merit being introduced in the PRCs banking regulation. The banking regulator can then devote particular attention to those exposures already above the threshold or approaching the limits and may then require banks to take preventive action before the exposures become excessively risky.
12. Deposit Insurance Schemes Discussion. Deposit insurance schemes are a component of the safety net arrangements in countries. Since the U.S. FDIC was created in 1933, deposit insurance has been used to prevent banking problems from becoming systemic banking panics, and in doing so it has helped stabilize
financial systems. The Asian financial crisis has led many countries to adopt or consider adopting a deposit insurance scheme to protect their financial systems as well as small depositors from the impact of bank failures. Deposit insurance schemes, however, create a moral hazard problem with increased risk-taking by banks and reduced market discipline by depositors. It is therefore important to structure a deposit insurance scheme so as to promote financial stability without unnecessarily creating moral hazard. While deposit insurance itself is a simple concept, a formal scheme is a relatively complex mechanism. Nations have designed different structures of deposit insurance schemes in order to obtain the benefits and mitigate the drawbacks of deposit insurance. This has resulted in a situation in which existing deposit insurance schemes among countries exhibit quite different features. (a) Explicit Versus Implicit Scheme The foremost difference between an explicit and implicit deposit insurance scheme is the formal arrangements established in the form of legislation. Among 13 countries (excluding the PRC) listed in Appendix A, Table 13, only Australia, Russia and Hong Kong, SAR, China have an implicit deposit insurance scheme, while Hong Kong is planning to establish an explicit deposit insurance scheme, or EDIS.43 In those countries with an EDIS, the coverage, type of deposits and institutions covered, maximum coverage limits, funding, membership and other features are stipulated by law explicitly. (b) Public Versus Private Schemes Deposit insurance schemes range broadly from pure public systems to pure private systems, with joint systems in between the two. Public funds can be made available through initial contributions at the establishment of the scheme, loans extended to the fund by the central banks, and actual losses covered by the government after they occur. The pure private systems are those that merely involve voluntary private agreements among banks to insure each others deposits. Between the two extremes are schemes funded jointly publicly and privately. According to a
43
In Hong Kong, a draft bill on a scheme was issued for further industry consultation in December 2002. The proposed scheme
would be funded by the industry and coverage would be set at HK$100,000 per depositor per bank. It is envisaged the scheme could become operational in 2005.
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survey conducted by the World Bank,44 51 percent of the countries surveyed have a joint fund, 15 percent of the countries have a private fund, and only 1 percent have a public fund. In 10 countries with EDIS listed in Appendix A, Table 13, 7 countries have a joint fund, 3 countries have a private fund, and none have a solely public fund. (c) Compulsory versus Voluntary Schemes Deposit insurance schemes can be either compulsory or voluntary. In most countries banks are legally required to join the scheme. Compulsory membership is intended to avoid adverse selection, a situation that arises when banks in the worst condition have the greatest incentives to join, while the opposite is true of the healthiest. Such a situation would not result in a well-funded insurance scheme. According to an IMF survey, 55 of the deposit insurance schemes are compulsory and only 14 schemes are voluntary.45 In the countries with EDIS listed in Table 13, all of the deposit insurance schemes are compulsory. (d) Amount of Insurance Coverage There are several ways to set coverage limits, such as per account or per depositor. Using the per account method may be incompatible with ensuring limited coverage since a depositor can easily circumvent the limit by opening multiple accounts in a single bank with an amount in each equal to or below the insured limit. Setting the coverage limit on a per depositor basis avoids that drawback but information requirements are greater since all deposit accounts held by a single depositor need to be identified and aggregated for deposit insurance purposes. According to the IMF survey, only two deposit insurance schemes covered each deposit account individually, even if a depositor held several accounts at a failed bank.46 All countries with EDIS in Appendix A, Table 13 cover each depositor (person). The maximum amount of protection varies widely from country to country. The German scheme comes close to providing full protection to non-bank deposits (private customers, enterprises, and public sector institutions), with the maximum per depositor being defined generally as 30 percent of the liable funds of an individual bank.
44 45 46
Asli Demirgc-Kunt and Tolga Sobaci, Deposit Insurance around the World: A Data Base, May 2002. Gillian Garcia, Deposit Insurance: A Survey of Actual and Best Practices, IMF Working Paper WP/99/54, 1999, p.17. Id. p. 18.
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In addition to setting a maximum level of coverage, some countries have incorporated coinsurance mechanisms into their deposit insurance schemes. Under a co-insurance system, the depositor has to bear the first portion of any losses that occur. The IMF survey shows that only 16 schemes out of 68 schemes have co-insurance mechanisms. Table 13 also shows that in only two countries with a scheme is there a co-insurance element. (e) Types of Deposits Covered In many deposit insurance schemes, some or all of the following types of deposits are excluded from coverage: foreign deposits of domestic banks, domestic deposits of foreign banks, interbank deposits, and deposits denominated in foreign currencies. According to the IMF survey, 20 deposit insurance schemes exclude all foreign currency deposits, and 45 schemes do not cover inter-bank deposits.47 Many countries that do cover foreign deposits pay out in domestic currency to protect the deposit insurance scheme from exposure to foreign exchange risk. 48 Table 13 shows that 6 out of 10 countries with EDIS provide insurance for foreign currency deposits and 7 countries with EDIS provide no insurance for inter-bank deposits. (f) Financing Deposit Insurance A deposit insurance scheme needs to be well-funded, ex ante or ex post. There are two basic ways in which deposit insurance may be financed through bank contributions. The ex-ante way is to set up a fund and require banks to make periodic premium payments into the fund. The expost way requires member banks to pay premiums or levies only after failures occur. In practice, as of spring 1999, only ten countries out of 68 had unfunded deposit insurance schemes and 8 of these counties were European.49 In 10 countries with EDIS in Appendix A, Table 13, only France and the U.K. (mainly) have an ex post fund. Most countries place the cost of deposit insurance largely or entirely on the banking sector by requiring periodic premium payments. Premium assessment involves an assessment base and fixed or risk-adjusted rates. Insured deposits or total deposits are employed as the assessment base, with insured deposits being employed in a substantial majority of deposit insurance schemes
47 48
Id. , p.18. Id. 49 Id., p. 19.
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according to the IMF survey. In Table 13, 5 countries with EDIS have insured deposits as the assessment base. The assessment rate applied to the assessment base could be the same for all banks irrespective of a banks financial condition, or could be set depending on the banks overall risk. Almost one-third of the total countries in the IMF survey have risk-adjusted deposit insurance system premiums.50 In Table 13, 3 out of 10 countries with deposit insurance schemes set premiums based on a risk-assessment. (g) Regulatory Responsibilities Some deposit insurers have responsibilities that are fairly narrow, so-called paybox systems, whereas others have responsibilities that are more expansive. A paybox system
normally does not have prudential regulatory and supervisory responsibilities or intervention powers. It is confined to paying the claims of depositors. In the other case a deposit insurer has a relatively broad mandate and accordingly more powers. These powers may include control of entry into and exit from the deposit insurance scheme, the ability to assess and manage its own risks, and the ability to conduct examinations of banks or request such examinations. Such schemes also may provide financial assistance to resolve failing banks in a manner that minimizes losses to the deposit insurer. Recommendation. The major role for a deposit insurance scheme is to prevent bank runs. But such a scheme creates a moral hazard problem, by increasing risk-taking behavior by banks and by reducing market discipline by depositors. When establishing a deposit insurance scheme therefore one should consider the trade-off between preventing runs and creating moral hazard with priority being given to preventing runs. Based on the international comparisons discussed above, the following is recommended in designing the PRCs future deposit insurance scheme to provide an appropriate balance. To effectively prevent bank runs, deposit insurance should be explicitly defined in law and regulation. Since a private insurance scheme lacks the full faith and credit of the government, it has only a limited pool of resources to deal with problems. In contrast, a government has far greater
50
Id., p. 24.
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access to resources through its tax-raising and bond-issuing powers. It is therefore proposed that a deposit insurance scheme should be administered by a public agency. To prevent adverse selection, participation in the deposit insurance scheme should be compulsory for any bank accepting deposits from the public. The proposed deposit insurance scheme should specify the maximum level of protection and the currencies covered. Coverage must be sufficient to prevent destabilizing bank runs (in other words, coverage should be set at a level so that the majority of depositors will be fully protected), but not so extensive as to eliminate all effective market discipline on a banks risk-taking behavior. Foreign currency deposits and inter-bank deposits should be excluded. Since the per-account method may enable a depositor to easily circumvent the coverage limit, the per-depositor method should be preferred. Although co-insurance is considered by many researchers as a way to enhance market discipline, it may not be workable in preventing bank runs. The reason is simple: no depositor would like to lose any funds deposited at a bank. As soon as depositors believe that they would suffer any losses, they will run as quickly as if there were no deposit insurance. To the extent possible, the protection provided by the deposit insurance scheme should be priced according to the riskiness of an individual bank and the potential cost of its failure to the scheme. This is regarded as the best way to minimize moral hazard, although admittedly it is very difficult to link insurance premiums with the degree of risk at a bank. The advantage of an ex-ante fund is that it tends to promote depositor confidence because there is something tangible for insured depositors to look to for protection. A deposit insurance scheme should thus be funded on an ex-ante basis. To minimize the risk to the deposit insurance funds, the deposit insurer should be granted some regulatory and supervisory power. This means the proposed law should clarify the responsibilities and functions of a deposit insurer. To fulfill its functions, the deposit insurer, as one of the bank regulators, should be separate from any other organization. G. Epilogue on new legislation
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Several aspects of the project teams proposals have been reflected in new laws and legislative initiatives, since the Draft Final Report was lodged in October 2003. The new Law on Banking Supervision, promulgated 27 December 2003, contemplates the implementation of the kind of risk-control policies identified above, although the details of the actual rules and guidelines that evolve from the new law will determine how much ultimate effect this report will have had. In addition, the coordination and information-sharing mechanisms, especially in the cases of troubled institutions, are planned for and partly defined. A significant element in this regard is the adoption of provisions for Prompt Corrective Action, when financial institutions become impaired, and an increase in the regulators disciplinary powers. In addition, the recommendations made on anti-money laundering measures have been taken up in earnest and the PRC is moving toward the formulation of a new basic law on the prevention of money laundering and financial crimes. While many recommendations have yet to be implemented, the speed and direction now being taken by the State Council suggests that a majority of them could be adopted within the next eighteen months.
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FINAL REPORT, SECTION III WTO COMMITMENTS
III. WTO COMMITMENTS AND COMPLIANCE ISSUES A. The Commitments and Compliance Issues
1.
Introduction
The TOR for the PRCs WTO commitments calls for examining inconsistencies of existing
financial sector laws and regulations with its commitments, identifying areas that need immediate action, and recommending means for proper legal and regulatory treatments both for the phaseout period of 3 to 5 years and for the final commitments.
2.
WTO Commitments
When it acceded to the WTO the PRC made significant commitments to opening its
banking sector to foreign competition.1 In doing so, it has overcome great resistance from local institutions, who will have to face increasing competition, and has had to review tax measures that have been more favorable to FFIs until now. By 2006, at the end of the five-year phase-in period, there will be no limitations on the ability of foreign financial institutions (FFIs) to operate in the PRC, whether by geographic location, currency (foreign or RMB), type of customer (foreign or domestic, institutional or individual), or type of entity (branch, wholly foreign-owned subsidiary, or joint venture) that do not equally apply to PRC banks.2 The only limitations listed in the PRCs schedule of commitments with respect to banking are as follows: (1) the minimum size of FFIs that may establish operations in the PRC are US$10 billion in assets to establish a subsidiary or joint venture and US$20 billion in assets to establish a branch; (2) to engage in local currency operation an FFI must have operated in the PRC for at least three years and been profitable in the two years preceding the application. The schedule specifically states that within five years of
1
The content of this section was prepared by Richard Self, Patrick Macrory, Guorong Zhang and Jingxia Shi.
PRC has recently already taken great steps in opening up its banking system to foreign competition. At the end of October 2003,
according to PBC officials, 157 foreign financial institution branches, 11 sub-branches, and 15 subsidiaries, 8 sub-subsidiaries of FFIs have been opened in the PRC. In February 2003 the total assets of these operations amounted to US$40 billion, and total capital was US$4.2 billion. Eighty-two foreign bank operations have been granted RMB licenses, and six have been granted licenses to conduct internet banking services. The first foreign bank was licensed to operate in the PRC in 1981.
2
However, under PRCs schedule of horizontal commitments under the General Agreement on Trade in Services (GATS), the
proportion of foreign investment in an equity joint venture must be at least 25 percent.
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accession, any existing non-prudential measures restricting ownership, operation, and juridical form of foreign financial institutions, including those on internal branching and licenses, shall be eliminated. This will include elimination of current practices that call for an interval of at least one year between the opening of a branch and the ability to start a second branch in the country. The same would be true of the one-year interval now required between establishment of a representative office in a jurisdiction and the opening of a branch operation of a bank. Thus, by 2006 the PRC must, under Article XVII of the GATS, provide national treatment to all FFI operations (i.e., it must give them treatment that is no less favorable than that given to domestic financial institutions, subject to the two listed limitations noted above). Even if the treatment of domestic financial institutions and FFIs is formally identical, it will nonetheless violate the national treatment requirement if it results in conditions of competition that favor domestic financial institutions (DFIs). Existing measures that will require repeal or alteration in order to meet these requirements are outlined. In addition, further measures, or changes to existing ones, are suggested that may be useful to the PRC, as it changes its banking system to meet its needs, particularly as they affect the treatment of foreign banks. The only exception to the national treatment requirement, apart from the two limitations spelled out in the PRCs schedule, is where a country takes prudential measures. These are defined to include measures taken to protect depositors or to ensure the stability and integrity of the financial system, in which case the PRC may impose more stringent conditions on foreign service suppliers provided that these measures are not being used as a means of avoiding the Members commitments or obligations under the Agreement.3 Although this definition is rather circular, it means that measures that treat foreign service suppliers less favorably than domestic suppliers will be protected under the prudential carve-out so long as they have a genuine prudential purpose and are not being used to disguise protectionism. The bottom line is that as of 2006, any measures (other than those listed in the PRCs schedule) that treat FFIs less favorably than domestic financial institutions might expose the PRC to challenge through the WTO dispute-resolution process, unless they are clearly based on prudential reasons. The general likelihood of a dispute challenging the reach of the prudential
3
GATS Annex on Financial Services, Article 2 (a). There are also, of course, a number of general exceptions specified in GATS
Article XIV and security exceptions listed in Article XIV-bis, but these would not be applicable here.
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carve-out is outlined below, including the circumstances that may be considered by a dispute panel in interpreting this provision.
3.
WTO Phase-out Period

The PRCs financial services schedule specifies that there are to be no geographic
restrictions on foreign currency business upon accession. The local currency and client limitations are to be gradually lifted over the five-year phase-out period. As noted above, the schedule also states that any existing non-prudential measures restricting ownership, operation, and juridical form of foreign financial institutions, including on internal branching and licenses, shall be eliminated. Although the wording is not entirely free from different interpretations, a reasonable reading of this language might be that the PRC has retained the right to maintain for five years any existing discriminatory measures. This could be construed to mean only measures existing at the time of the PRCs accession, but a better view is that it would include measures introduced after accession but before the end of the phase-out period.4 In any event, it appears that most, if not all, of the restrictive measures existing today were in effect at the time of accession, so they would be protected even under a narrower definition.
4.
Approach to the Task

The first phase of this study on the WTO within this project consisted of a review all of the
PRCs laws, regulations, rules, and other legal pronouncements relating to banking to determine the instances where foreign financial institutions are treated less favorably than domestic banks. The PBC provided a database, which contains all of the PRCs banking laws and regulations issued by the National Peoples Congress and the State Council, and rules and other legal pronouncements published by the PBC, numbering approximately 2,000 in all. The preliminary
There was a good deal of debate during the negotiation of the GATS about whether countries would have the right to adopt
more restrictive measures in the future in areas where they had not taken on obligations. It was eventually agreed that they could do so, because countries could not guarantee the future direction of their regulatory system, which might in the future become more restrictive. Of course, a country could agree to a standstill commitment similar to that contained in Paragraph A of the Understanding on Commitments in Financial Services, to which most of the OECD countries subscribed. The PRC, however, made no standstill commitments in the area of financial services.
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review of this database identified about one hundred relevant enactments, which were reviewed in detail. Where measures that treat FFIs less favorably than their domestic counterparts are identified, they are reviewed to consider whether they can be regarded as prudential, in which case they would be protected under the prudential carve-out. Where it was not obvious that measures that impose more stringent conditions on FFIs have a prudential basis, they are so identified in this report. Particular attention has been paid to measures about which concern was expressed by other WTO members in the transitional review of the PRCs implementation of its financial commitments in October 2002. These include the requirement that after approval has been given to open a branch bank, the FFI must wait for one year before applying to open another branch, and the fact that eligibility to conduct local currency operations (three years of operation in the PRC and profitability for the two years prior to the application) is applied on a branch-by-branch basis rather than on the basis of overall operations. The paramount criticism, however, in the eyes of the foreign banks, seems to be with the size of the PRCs capital requirements for foreign banks, in particular branches, as represented by a letter from the Financial Leaders Group, consisting of banks and other financial services institutions from Europe, the United States, Canada, and Japan. These concerns were underscored further in discussions with representatives of foreign banks in Beijing and Shanghai. The PRC authorities were not available, however, to discuss this in detail. The concern here is that the PRCs capital requirements for foreign financial institutions are considerably higher than those imposed by bank supervisors in other countries.
5.
The Exception for prudential measures & prospects for interpretation under GATS
The GATS provides little guidance as to the type of regulatory measures that qualify under
the prudential carve-out.5 Indeed, financial authorities of WTO member countries have resisted suggestions to provide any clarification to this provision, preferring to allow the specific language alone to speak for itself. To a considerable extent, all bank regulators want to preserve as much flexibility as possible for themselves in this area, which reflects their general
See, e.g., Kern Alexander, Working Paper No. 5, The World Trade Organization and Financial Stability: The Need to Resolve
the Tension Between Liberalization & Prudential Regulation, ESRC Centre for Business Research, Cambridge University, at 23.
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willingness to avoid any clarification that may otherwise undermine their own supervisory practices. Indeed, there is some question whether governments will challenge measures they generally would not consider to be prudential in nature out of fear that the reasoning of a dispute panel may yield precedent that could be used against their own practices. Since the WTO entered into force in 1995, there has been a proliferation of disputes in a wide range of WTO areas, as its members have taken advantage of the more efficient procedures for enforcing their rights under the Agreement. However, there have been only two such disputes under GATS, both of which are unrelated to financial services. Indeed, if a dispute were to arise in the case of financial services, the rules of the Dispute Settlement Understanding require that panel members must be experts in the area of financial services. This panel composition mitigates somewhat the prospect that a dispute involving banking practice will necessarily lead to a more adventurous decision, which has been a criticism of a number of dispute panel reports in other areas. Furthermore, governments alone determine whether they will try to exercise their WTO rights through dispute settlement procedures. Private sector interests may encourage the resolution of market access problems through use of WTO dispute procedures. However, in the case of banking and other financial services, Finance and Central Bank authorities are more likely to prevail in a WTO members decision to bring a dispute that would require legal interpretation of the prudential carve-out. Thus, there are certain institutional firewalls that may discourage actions that lead to any interpretation of the prudential carve-out through quasi-juridical means.6 Nevertheless, it will useful to provide an assessment of how a WTO panel would interpret the prudential carve-out, should it become a legal defense against a WTO member challenge relating to a bank measure of the PRC. Yet, this assessment is made without the benefit of any formal guidance in the form of negotiating history, case law, or other explanatory data that would lend greater legal clarity to this provision. However, there are certain norms, based upon WTO precedent, as well as other factors that a panel is more likely to use in judging the PRCs banking and financial system, which should be of some guidance to the PRC in anticipating any vulnerability its banking measures may have to this exception in GATS. If a WTO member
For a different view on the likelihood of a WTO dispute leading to the interpretation of the prudential exception, see Alexander,
Supra 23.
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challenged the PRCs banking measures, the most likely ones to be challenged would be practices where the PRC provides less favorable treatment to foreign banks and, in addition, does not conform to practice generally adopted by other countries, or otherwise does not conform to international standards. In this connection, an assessment of practices by other countries, compared to those of the PRC is provided in Appendix B. This assessment encompasses a range of countries of varying size and economic development, so that the PBC will have a comparative basis to analyze its existing practice in specified supervisory and regulatory areas. The measures selected for examination, below, are those that do not appear to provide the same treatment for PRC banks, together with an evaluation of whether they can be justified as prudential in nature and therefore consistent legally with the PRCs WTO obligations.
B. The PRCs Bank Capital Requirements and WTO Consistency
1. Foreign subsidiaries
Before examining this list of practices, the initial focus will be on the PRCs capital requirements for foreign bank subsidiaries and branches, since this could be the most likely area for legal challenge to a defense of the prudential carve-out. This is done to show how: (1) these requirements are considerably larger for foreign banks than PRC banks, and are the least comparable to those of other countries, and (2) the PRCs capital requirements have generated the most criticism by foreign banks, compared to any other measure of a prudential nature. They, therefore, have achieved a certain visibility level to which PRC authorities may wish to give attention. In the PRC, the capital requirements for the establishment of FFIs as subsidiaries are generally smaller than those for DFIs. The minimum limit of registered capital of FFIs is convertible foreign currencies on a par with RMB, ranging from 300 million7 to 1 billion, depending on the scope of business. For PRC banks, Article 1 of the Interim Provisions on the Establishment of banks and branches provides that for the establishment of a national
7
Article 5 of the Regulations of the Peoples Republic of China on the Administration of Foreign-Funded Financial Institutions 2001.12.12 (hereinafter referred to as the Regulations). In the Detailed Rules for the Implementation of the Regulations of the Peoples Republic of China on the Administration of Foreign-funded Financial Institution 2002.2.1 (hereinafter referred to as the Rules), the requirements are raised to a higher level, but still less than those of DFIs.
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bank, the minimum capital requirement is 2 billion; for a regional bank, the minimum capital requirement is 1 billion. However, there generally are larger capital requirements for branches of foreign banks, which have established subsidiaries in the PRC. These branch-capital requirements range from a minimum RMB 100 million to RMB 600 million depending on the scope of operation. In contrast, branches of PRC banks require branch capital of a minimum RMB 100 million. Thus, the overall costs of a fully-branched foreign bank subsidiary could be higher than its PRC counterparts, if it operates a series of fullservice branches. This higher cost to the foreign subsidiary very much depends on the prescribed activities of the subsidiary and its branches, which are less likely to exceed the costs of PRC counterparts if its activities are more limited and the required branch capital is therefore less. For instance, if the branch of the foreign bank is engaged solely in foreign currency business, then its branch working capital requirements are no different than those of PRC banks. Thus, it is less than certain that the foreign subsidiarys operations, overall, would yield a cost of capital any higher than that imposed on its PRC counterparts. This would make a possible national-treatment allegation even more difficult to produce. There are, of course, other arguments that could be raised in WTO, which could take the form of de facto national treatment, where the allegation could build around the existing situation of PRC banks, in which 75% of total bank assets rest in the hands of state banks, and where an extensive branch network already exists for these banks. Under these circumstances, the allegation would be that the capital requirements on foreign subsidiaries, while less than those imposed on PRC banks, alter the conditions of competition against the foreign banks, in light of the unique situation of the dominance of state ownership of banks in the PRC. This network of state-owned banks has existed since competition in banking was introduced in the PRC. Thus, the higher capital requirements on PRC banks, do not, as a practical matter, enter into their cost of doing business, and the relatively high capital requirements for foreign bank subsidiaries, compared to similar such requirements in most other countries, may alter the conditions of competition. It is hard to conclude that any such allegation could be sustained, in part because any new indigenous bank established in the PRC faces clearly higher capital requirements than foreign banks. Furthermore, any de facto allegations in this regard must be viewed within the context of the prudential carve-out, which, as pointed out earlier, provides a basis for less favorable
treatment of foreign financial institutions under WTO rules. Nonetheless, the capital requirements for establishing a bank subsidiary in selected foreign countries are set forth in Appendix B.
2. Foreign Branches
Quite a different situation exists for the capital requirements of foreign bank branches, when compared to those imposed on PRC branches, and this presents comparatively more distortion under the national-treatment provision. According to article 5 of the Regulations, the working capital of branches of foreign banks shall be no less than convertible foreign currencies on a par with RMB 100 million, which is the same as the requirements for domestic banks branches. 8 However, articles 31-36 of the Detailed Rules for the Implementation of the Regulations of the Peoples Republic of China on the Administration of Foreign-funded Financial Institutions (hereinafter referred to as the Rules) provide different and considerably more detailed rules governing working-capital requirements, when the branch enlarges its business scope. For example, the working capital of a foreign bank branch operating comprehensive foreign exchange business for all kinds of customers shall not be less than convertible currencies equal to RMB 200 million;9 for a branch operating comprehensive foreign exchange and RMB business, the working capital shall not less than RMB 600 million. 10 On the other hand, DFI branches follow less detailed requirements when enlarging their business scope. Article 19 of the Commercial bank law only stipulates that the commercial banks should, according to relevant stipulations, allocate a suitable amount of operation funds to their branches, which are set up within the PRC. These different requirements for foreign bank branches, therefore, are relatively more vulnerable to WTO challenge. Aside from the differences in branch capital requirements for foreign banks, there is a degree of difference between domestic and foreign banks, depending on the range of
Article 2(3) of the Interim Provisions on the Establishment of Banks and Branches 1994.8.9, the working capital of a branch
shall be no less than 100 million.

9
Article 32 of the Rules. Article 36 of the Rules.
10
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services the foreign bank branch offers. The bottom line is that foreign branches may pay up to six times as much as their PRC counterparts if the foreign bank branch offers full RMB and foreign currency business to persons and enterprises. While foreign bank branching is still in the relatively early stage of development, this studys comparative assumptions are based on a more involved foreign-bank presence in the PRC in future, especially when the PRC assumes all of the obligations it undertook in the process of joining the WTO. As foreign banks begin to exploit the new opportunities available to perform different kinds of banking in the entire country, then the cost of capital associated with these ambitions could become more of an issue than it is now. Viewed from the legal context of the WTO, the question is whether the PRCs higher capital requirements for foreign bank branches, compared to those of their PRC counterparts, could be construed as constituting a national-treatment violation, taking into account the broadly expressed prudential exception that applies to financial services. This exception must be assessed in the light of two purposes defined by the prudential carve-out: (1) the protection of deposit holders, and (2) ensuring the integrity and stability of the financial system. The PRC authorities could establish a more objective standard, in relation to capital requirements, which addresses the protection of deposit holders. In this case, the criteria should more closely relate to the amount of deposits the bank possesses and is likely to have on hand, based on its best projections. Of course, there is no absolute requirement that authorities must impose higher capital requirements on foreign banks than domestic institutions, as provided under the prudential exception. However, they can protect deposit holders using appropriate ratios of capital to deposits to address this objective. However, even within the bounds of the prudential carve-out, capital requirements of the size enumerated by PRC regulatory authorities are likely to generate a future challenge from another WTO member. The second purposethat of ensuring the integrity and stability of the financial systemis comparatively more subjective, and more difficult to reduce to numerical terms. Any number of considerations can be relevant here, and it is far more difficult to suggest a particular formula that might appropriately govern such a test, in light of its scope. Arguably, this second purpose provides more of a defense against any WTO allegations against the PRCs capital requirements. Should this more subjective consideration ever
reach WTO adjudication, a dispute panel might assess whether there are international standards or a similarity of practices by a range of countries that help act to ensure the integrity and stability of the financial system. The only international standards that exist in the area of capital are found in the Basle Accords, to which the PRC and most other countries subscribe. However, the Basle Accords, which address capital adequacy, are confined to the elements that comprise core and supplemental capital, the former including equity, earnings, subordinated debt, and securities. There are some suggested disciplines on the level of supplemental capital in the general provisioning for loan losses. However, the Basle Accords do not prescribe the size and amount of capital levels for banks. It is appropriate to examine the branch-capital requirements of a range of countries, in the event a dispute panel follows time-honored precedent to assess the reasonableness of a countrys regulatory behavior in the light of general practice by other countries. The ultimate test of discrimination rests with how banking authorities treat foreign service providers, compared to domestic service providers in like circumstances. Nevertheless, international comparison could be factor that a WTO dispute panel may examine. Generally, the countries surveyed impose lower branch capital requirements on foreign banks than the PRC does. (In each comparison, the highest level of foreign-branch capital amount imposed by the PRC has been used: RMB 600 million. Obviously, the differences are less when compared to foreign branches that offer more limited operations in the PRC.) In comparison with European Community countries, the PRCs foreign branch capital is roughly 30 times that imposed in EU countries. In the United States, the ratio is roughly the same, comparing branch capital requirements of the state of New York, the state with the highest branch-capital requirements. Other countries offer the following comparison with the PRC: Canada: 24; Japan: 1.13; Hong Kong, SAR, China: 4.20; India: 3.76; Poland: 30; Russia: 30; Korea: the same. 11 Thus, there is some variance in the multiple of the PRCs capital requirements of those in other countries for foreign bank branches. However, with the exception of Korea and Japan, the PRCs branch capital requirements are
11
Please see the attached table 1 in Appendix B.
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considerably higher, and presumably the basis for the many complaints that have arisen from the foreign banking organizations.
3. The Prudential Exception and the PRCs Branch Capital Requirements

Thus, while the comparison with international behavior that may be used by a dispute panel could work to the detriment of the PRCs legal defense, the ultimate legal question, in interpreting the prudential carve-out, is whether the PRCs branch-capital requirements are used as a means of avoiding the Members commitments and obligations under the Agreement. As stressed earlier, there is no negotiating history of the prudential carve-out to provide further clarity with respect to this provision. However, the relatively high capital requirements could be construed to imply an element of intent on the part of bank authorities as a means of circumventing their WTO obligations. In the broad regulatory environment of prudential supervision, it would be difficult indeed to establish such intent. Any examination of the PRCs high capital requirements must take into account its own system of banking and the particularities surrounding it. The PRCs banking system consists largely of four state-owned banks, which comprise at least 70% of banking assets in the PRC. Foreign banks, which are likely to assume a greater role in the PRC as a consequence of its WTO accession commitments, now comprise approximately 2% of bank assets in the PRC. Thus, any assessment of the safety and soundness of the PRCs banking system must take into account the relative health of the state-owned banks, for at least the near and medium term. The PRC has instituted a number of reforms that have injected greater competitive opportunities in its system of banking, and the state-owned banks have been encouraged to adopt more market-oriented practices. Nonetheless, the state-owned banks do not operate profitably. They must continue to manage a portfolio of non-performing loans, many of which have been extended to some state-owned enterprises that stand little chance of future financial stability. The PRC must continue to manage such an environment, which is a different one compared to any of the countries examined in the survey. In this context, the PRC must assess the role (and subsequent growth) of foreign banks, whose presence is relevant to the overall health and management of the entire banking system of the PRC. While it seems clear that the PRCs system of banking will change over time, enabling greater participation of private domestic and foreign banks,
there are sensitive issues associated with managing the current liabilities of the current system that has a relationship to further changes to the system. In short, overnight change could prove a disaster for the PRCs financial system and its economy. Thus, its prudential standards, including capital requirements, will play a role in the management and timing of change. Viewed in this context, the PRCs very high capital requirements for foreign banks must be assessed in light of the management of a unique system of banking, whose prudential standards are directly related to the safety and soundness of its banking system. The authors believe it is unlikely that a dispute panel, if one were ever constituted to judge the PRCs capital requirements, would conclude that they violate the PRCs nationaltreatment obligation, in light of the prudential carve-out. However, a more persuasive legal defense of the capital requirements would be a clearer demonstration that they are part of a broad-based plan to promote stability and competition in the banking system. If the sole effect of the PRCs capital requirements is to maintain a tight lid on the share of foreign banking activities in the country, then there is probably less chance that the PRC successfully could defend its high capital requirements against any potential WTO challenge to them. In any event, a reassessment of the PRCs very high capital requirements on foreign banks, in particular branches, is strongly encouraged, with a view toward rationalizing them in light of overall prudential supervision. The PRC must measure these requirements against its overall policy objectives, which are to encourage greater competition in the banking sector, and one that includes further participation of foreign banks in its financial system. Naturally, this greater openness calls for sound supervisory practices in line with appropriate prudential considerations. Currently, the PRCs high capital requirements surely contribute to the very low level of foreign participation (2% of total bank assets in the PRC), and could continue to do so despite the new opportunities opening up to foreign banks as the result of WTO obligations. Put another way, current branch capital requirements may act to undermine those opportunities, since it will be simply too expensive for foreign banks to take advantage of them. Branch capital requirements should be based on a number of factors, which would include consideration of the foreign-bank branchs consolidated capital in its home country, which is re-calibrated continuously on the basis of the banks foreign operations, including, of course, its operations in the PRC.
In addition, capital requirements should follow well-established supervisory principles of risk management, which build in more predictable risk calculations for specific kinds of exposure, leading to more uniform levels of capital requirements. Finally, the PRC should continue to adhere to the Basle Accords standards of capital equivalency, which are an important factor in insuring greater uniformity among regulators in imposing capital requirements. The PRC has, of course, taken these elements into account in assigning foreign branch capital. Nevertheless, a re-evaluation of these levels seems clearly in order in light of the rather significant differences in capital requirements it imposes on foreign branches compared to the preponderance of countries surveyed. This has the additional benefit of being responsive to the strong concerns expressed by the foreign banks and other financial institutions over the level of capital requirements, and it minimizes any possible threat of a legal challenge to these requirements. These steps, of course, would be consistent with the gradual opening the PRC has taken with respect to foreign banks, as represented in its WTO commitments to market access and national treatment.
C. Qualifications of Applicants Establishing Banking Subsidiaries within the PRC In the PRC, to incorporate a foreign-funded bank or a foreign bank branch, the applicant must be a financial institution.12 In contrast, the shareholder of an indigenous PRC bank can be an institution other than a financial institution. For example, industrial and commercial entities can make equity investment in financial institutions under certain conditions.13 The question therefore arises whether this requirement could be viewed as discriminatory under WTO obligations, or otherwise can be governed by its prudential exception. In this context, it is useful to examine the practices of other countries on this issue, and the data suggest that many countries have similar restrictions, as to the kind of foreign financial institution that can establish a bank, as the PRC does. For example, until 1999,
12 13
Articles 6-8 of the Regulations. Article 10 of the Interim Provisions on Equity Investment in Financial Institution 1994.8.9
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the U.S. restricted non-bank finance institutions from incorporating a bank14. As can be seen in the reference tables 15 , many countries have different levels of restrictions on industrial firm investments in banks. Given that banking operations need more expertise, have large capital requirements and are extremely important to the national economy, it should be concluded that this financial-institution requirement is prudential rather than discriminatory. However, Articles 4-5 of the Rules may be challenged under WTO commitments. Article 4 provides that the only shareholder or the majority shareholder of a solely foreignfunded bank must be a commercial bank. Under Article 5, the only shareholder or the holding shareholder of the foreign party to a joint venture bank must be a commercial bank. Against this, the PRCs WTO obligations with respect to the establishment of a solely foreign-funded bank and a joint venture bank state that FFIs who own total assets of more than US$ 10 billion at the end of the year, prior to filing the application, are permitted to establish a subsidiary of a foreign bank or a joint venture bank.16 This provision suggests that an FFI that is not a bank (insurance company, securities company, credit card company, etc) can establish a bank in the PRC, whether it is the only shareholder or the majority shareholder. This is contrary to current PRC measures as provided in Articles 4-5. It may be premature to fully assess the WTO implications of the apparent contradiction between the PRCs stated obligation to allow non-bank foreign financial institutions to establish banks in the PRC, and the PRCs Rules that prohibit such activity. However, some clarification may be useful to explain the apparent contradiction in the PRCs WTO schedule with respect to the kind of finance institution that can establish a bank in the PRC and the requirement in PRC law that it must be a foreign bank. No specific evidence has come to light that there was any intention to cover any institutions other than banks in case of the sole or majority shareholder, but the commitment itself seems less than clear in this regard. In any event, there seems little doubt that an FFI, not
14
Permissible activities for banking organizations in various financial centers, Global Survey 2002, Institutite of International
Bankers.
15 16
Appendix A, Table 5 (Ownership Structure) and Appendix B, Table 3 (Industrial Firm Investments in Banks). The PRCs Schedule of Specific Commitments on Services, Part 7.B
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otherwise engaged in banking, could still meet necessary capital and other prudential requirements as could a bank, if indeed this is allowed.
D. Asset-Pledge Requirements on Foreign Bank Branches The PRC is among several countries, which impose working-capital (dotational capital) requirements on foreign branches. In addition, Article 24 of the Regulation provides that 30 percent of the working capital of a foreign bank branch shall be in the form of interest-earning assets designated by the PBC, including bank deposits designated by the PBC (asset-pledge requirements). In contrast, there is no similar requirement imposed on domestic bank branches. The practical effect is that foreign bank branches only has discretion over 70% of their capital, while PRC domestic banks, in theory, have discretion over all of their branch capital to extend credit. This arguably imposes a higher cost of capital on the foreign bank as it tries to meet business needs. The issue here is whether the 30 percent asset pledge of the working capital requirements discriminates against foreign banks under the PRCs WTO obligations, taking into account the prudential carve-out. In assessing the national treatment implications of the asset-pledge requirement, a fundamental question is why the requirement is imposed solely on foreign bank branches alone. The foreign bank branch is arguably protected by its parent-company capital in meeting prudential needs. As such, its PRC branch activities are supervised by the home country regulator, which is obliged to raise capital requirements of the parent in relation to the activities of its overseas branches, including its branch in the PRC. This practice of consolidated supervision by the parent company regulator is consistent with bank supervisory practices recommended by the Basle Accords. Thus, it is not surprising that most countries do not impose asset-pledge requirements on foreign bank branches located in countries. As can be seen from table 317 and table 418, the practices in other countries can be divided into three categories:
17
Appendix B, Table 3, Applicability of host country endowment/ dotational capital requirements for branches of non-domestic
banking organizations. Global Survey 2002. Institute of International Bankers.
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Countries that apply capital requirements on foreign bank branches but do not impose assetpledge requirements on foreign bank branches. These include Australia, Belgium, France, Germany, Korea, Italy and Korea.
Countries that do not apply capital requirements, but use the asset-pledge requirements as a substitute. The practices in the U.S and Canada are quite typical. In the U.S, at the federal level, the International Banking Act of 1978 provides that branches and agencies licensed by the Office of the Comptroller of the Currency must maintain a capital-equivalency deposit equal to at least 5% of their third-party liabilities. In Canada, the authorized foreign bank should deposit in Canada unencumbered assets of a type approved by the Superintendent: in the case of an authorized foreign bank that is subject to the restrictions and requirements referred to in subsection 524(2), one hundred thousand dollars, or in any other case, ten million dollars or any greater amount that the Superintendent specifies.19
Countries neither applying capital requirement nor applying asset-pledge requirements. These include Australia, Finland, Hong Kong SAR, Ireland, Japan, Norway and Sweden. PRC asset-pledge requirements insure a source of liquid assets that are more
geographically proximate to depositors, and arguably a more secure liquid asset base from which they are protected in the event the bank suffers financial difficulty, either in the PRC or abroad. No such requirement is necessary for branches of PRC banks, since most, if not all, of its assets are located in the PRC and more easily attached by regulatory authorities in the event of bank financial difficulties. Foreign bank branching in the PRC is still at a relatively early stage of development, and it is difficult to assess the extent to which the asset-pledge requirement burdens the activities of foreign bank branches. For the moment, the issue appears to be a less visible issue for the foreign banks than overall capital requirements referred to earlier in this section. Nonetheless, if a WTO dispute were brought against the PRC for these practices, there is some question whether the panel would regard the form of deposit-holder protection as being outside the prudential exception, even though it clearly is more burdensome to foreign bank branches than their
18
Appendix B, Table 4, Applicability of asset pledge requirements to branches of non-domestic banking organizations operating
in a host country, Global Survey 2002, Institute of International Bankers.

19
Section 534(3) of The Bank Act of Canada 1999
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PRC counterparts. The panel may conclude that while some form of discrimination clearly exists, the prudential exception provides the PRC with sufficient flexibility to treat foreign bank branches differently in terms of tied up capital, taking into account the difficulty in having to source foreign-based capital if the branch encounters financial difficulties. Conversely, the panel may view the PRCs practice with less sympathy, in light of international practice. As pointed out earlier, WTO panels frequently assess the WTOconsistency of a practice in terms of international practice, which may point the way to an adverse decision against the PRC. The panel may follow well-established WTO jurisprudence and conclude that there is a less restrictive alternative to the asset-pledge requirement. In conclusion, it may be prudent for PRC authorities to review the asset-pledge requirement, in the light of international practice, the uncertainty of the reach of the prudential carve-out in such circumstances, and whether such a practice would be tested under the WTO. Clearly, international practice offers a less burdensome alternative.
E. Ratio of Fixed Assets to Equity in Subsidiaries In the PRC, according to article 27 of the Regulations, the fixed assets of a solely foreign-funded bank, a solely foreign-funded financial company or a joint venture financial company shall not exceed 40% of equity. For domestic banks, there is no absolute percentage provision. However, general regulatory practice in the PRC does not permit PRC banks to make investments in fixed assets of non-self use.20 Thus, the only possible element of discrimination is the more absolute rule of 40% with respect to foreign banks, while in the case of indigenous banks, they are provided more flexibility in the absolute percentage of fixed and liquid assets. The second possible national treatment issue is whether the 40% rule presents a de facto deviation from national treatment by altering the conditions of competition to the detriment of foreign banks. Accordingly, on the surface, it is hard to say that the above restriction on foreign-funded banks contains an element of discrimination unless the 40% rule is administered in such a way that foreign banks have
20
Article 43 of China Commercial Banking Law 1995.
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less flexibility in having, for a relatively brief period of time, fixed assets that might exceed the 40% limit , since limits on fixed assets of any bank are standard prudential practice to assure the liquidity of the financial institution. Even it were viewed as discriminatory, the legal breadth of the prudential carve-out would make such practice legally acceptable under WTO rules. As explained in examples below, the PRCs practice generally is consistent with that of other countries. In the U.S., according to Section 29 of the National Bank Act21, a national banking association in America may purchase, hold, and convey real estate for the following purposes, and for no others: First. Such as shall be mortgaged to it in good faith by way of security for debts previously contracted; Second. Such as shall be mortgaged to it in good faith by way of security for debts previously contracted; Third. Such as shall be conveyed to it in satisfaction of debts previously contracted in the course of its dealings; Fourth. Such as it shall purchase at sales under judgments, decrees or mortgages held by the association, or shall purchase to secure debts due to it. The legislation further provides that for real estate in the possession of a national banking association, upon application by the association, the Comptroller of the Currency may approve the possession of any such real estate by such association for a period longer than five years, but not to exceed an additional five years. Another example is Singapore. According to article 33 (1) of the Banking Act of Singapore 1999, a bank shall not purchase or acquire any immovable property or any right therein exceeding in the aggregate 40% of that banks capital funds except as may be reasonably necessary for the purpose of conducting its business or of housing or providing amenities for its staff, but Article 33(2) further provides that the above provision shall not prevent a bank from securing a debt on any immovable property and, in the default in
21
According to Section 29, sub-section (b) of U.S International Banking Act 1978: except as otherwise specifically provided in
this chapter or in rules, regulations, or orders adopted by the Comptroller under this section, operations of a foreign bank at a Federal branch or agency shall be conducted with the same rights and privileges as a national bank at the same location and shall be subject to all the same duties, restrictions, penalties, liabilities, conditions, and limitations that would apply under the National Bank Act to a national bank doing business at the same location.
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payment of the debt, from holding that immovable property for realization by sale or auction at the earliest suitable opportunity. Some other countries have similar limitations on the ownership of fixed assets, though the percentages are higher than that of the PRC. For example, The Banking Act of Korea 1999 provides that the following business are prohibited: ownership of real estate (excluding real estate acquired through the exercise of a security such as mortgage) other than real estate for business purposes; ownership of real estate used for business purposes in excess of an amount equivalent to the ratio as determined by the Presidential Decree with the limits of 100/100 of equity capital. The Banks Act of Turkey 1999 stipulates22 that Banks shall not engage in purchase and sale of real estate or commodities for commercial purposes. The total book value of real estate acquired by a bank, net of depreciation, can not exceed 50 percent of the banks own funds. Though the limitation on the ownership of the PRC may fall within the prudential carve-out, it is suggested that the provision on the ownership of a fixed asset could be administered more flexibly, at least in situations where a bank supervisor must take account of a fixed asset obtained by a bank.
F. The Ratio of RMB Assets in Capital to RMB Assets in Risk Assets In addition to the 8% capital adequacy requirement,23 Article 28 of the Regulation provides that the proportion of RMB in the assets of an FFI and the proportion of RMB in its risk assets shall not be less than 8%. The PBC shall adjust the proportion according to the relevant provisions gradually. This RMB 8% ratio (hereinafter RMB capital-adequacy ratio) is only imposed on FFIs. For domestic banks, there is no separate RMB capital-
22
Article 12.2 (titled as Subsidiaries, Prohibition on Trading of Commodities and Real Estate Transactions) of Banks Act of
Turkey 1999,
23
Article 25 of the Regulations: the rate of capital sufficiency of a solely foreign-funded bank, a joint venture bank, a solely
foreign-funded financial company or a joint venture financial company shall not be less than 8%. This requirement is the same as provided in para. 1 of article 39 of Commercial Banking Law
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adequacy ratio.
The question is whether the 8% requirement that FFIs must hold
separately for foreign exchange and RMB assets is discriminatory within WTO rules or is otherwise within its prudential exception. Capital adequacy is the minimal level of capital for a bank viewed as a necessary cushion against the risks to which a bank is exposed. The international practices, as the 1988 Capital Accord of Basle Committee represents, are 8%. Though few countries have local-currency capital-adequacy requirements, it can still be argued that the PRCs RMB capital-adequacy ratio is prudentially-based for the following reasons:
First, obviously, the aim of the provision is to control the risk of RMB business of FFIs, promoting their safety and soundness and constituting a more comprehensive approach to addressing risks;
Secondly, since RMB is still not convertible, for FFIs which engage in RMB business, it is reasonable to impose certain capital-adequacy requirement for RMB business;
Thirdly, this provision will not put FFIs in a less favorable position in competition.
According to article 39 of Commercial Bank Law, domestic banks are subject to the 8% capital-adequacy requirement, given that the main business of domestic banks are RMB related activities, in practice, such a requirement becomes largely equivalent to what foreign banks must bear. It can, therefore, be concluded that the requirement of imposing separate capitalequivalency requirements of foreign banks will not represent a consequential difference in treatment to such requirements on PRC banks. Furthermore, as noted above, such requirements seem within the legal context of the prudential exception.
G. The Ratio of Foreign-Exchange Deposits to Total Foreign-Exchange Assets Article 30 of the Regulations provides that the total amount of foreign-currency deposits from within the territory of the PRC in an FFI shall not exceed 70% of the total foreign-exchange assets the institution holds in the PRC. Actually, this percentage has been
raised from the previous 40% to the current 70%. Nevertheless, since there is no such limit on domestic banks, its consistency with the PRCs national-treatment obligations in banking needs to be assessed. According to the GATS Annex on Financial Service, to be a prudential measure, two criteria must be met: first, it aims to protect the interest of investors, depositors, etc, or to ensure the integrity and stability of the financial system; second, it shall not be used as a means of avoiding the Members commitment or obligations under GATS. It seems that the PRCs practice is quite unusual, when compared with other countries. Generally, in countries where currencies are convertible, there generally are no requirements to restrict the limit of foreign-exchange deposits taken by FFIs. There are, however, a limited number of countries, which have provisions similar to that of the PRC. For example, on January 1, 2002,the State Bank of Pakistan instructed banks that their foreign-currency deposits mobilized under certain situations should not at any point exceed 20 percent of the local-currency deposits of the banks.24 Article 8(3)(b) of the Banking and Financial Institutions Act of Malaysia 1989 provides that the Minister may impose limitations on the acceptance of deposits, although the actual amount is discretionary. One interesting statutory example is Singapore, where the authorities may limit the total amount of foreign-exchange transactions if it is necessary or expedient in the public interest or the interest of the banking system.25 This would possibly empower the authorities to limit the amount of foreign-exchange deposit if they wish. In any event, the general practice among countries is not to impose such limits. The 70% requirement would seem to be an artificial limit not related to the protection of deposit holders or the safety and soundness of the banking system. There are other less costly means of achieving these objectives without the imposition of such a requirement. First, on the surface, it aims to limit the ability of FFIs to take foreign exchange-deposits. As a result, the ability of FFIs to make foreign-exchange loans would be limited since banks usually use deposits rather than their own capital to extend loans. Second, it has very little to do with the protection of the interest of depositors, nor would this limit enhance the
24 25
Page 125, Global Survey 2002 made by the Institute of International Bankers. Article 54A(m), The Banking Act of Singapore 1999.
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safety of financial system. Finally, under the GATS, the PRC is obliged to accord to services and service suppliers of any other Members, in respect of all measures affecting the supply of services, treatment no less favorable than that it accords to its own like services and service suppliers.26 This 70% limit has obviously put FFIs in a less favorable situation compared with DFIs. The conclusion, therefore, is that the 70% limit on the amount of foreign-currency deposit cannot be justified for prudential reasons, and the prudential exemption would therefore not serve as a successful legal defense in the event this practice were to be challenged in the WTO. The suggestion is that the PRC gradually raises the percentage during the transition period of assuming its full WTO obligations and finally eliminate this provision after 2006.
H. Conditions for Establishing Branches In the PRC, if a solely foreign-funded bank or a joint venture bank applies to establish a branch, the following conditions must be met: first, having practiced in the PRC for at least three years, and been profitable for the last two successive years; second, for the establishment of an additional new branch, the application may only be filed one year after the last branch approval.27 On the other hand, the conditions for the establishment of a domestic bank branch are less stringent: the applicant must have practiced for more than 1 year with good business achievement.28 The problem for FFIs is that these requirements effectively impose time delays on their ability to establish bank branches in cities and regions where they want to do business. This arguably works to their competitive detriment since PRC banks are already established in most geographic areas of the PRC, giving them an advantage in establishing a deposit and client base among the population. Thus, an element of discrimination clearly exists in these required intervals imposed by PRC banking measures. Two issues arise in
26 27 28
Article XVII of GATS. Article 15 (1). (3) of the Rules. Article 2 (1) of the Interim Provisions on the Establishment of Banks and Branches 1994
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this context: (1) whether the PRCs WTO obligations for the establishment of foreign bank branches permit such requirements after 2006; and, (2) whether there is a conceptual or prudential basis for imposing such conditions on the foreign branches. For the practicing period imposed on FFIs, it may be argued that the authority needs more time to examine the business operation of an FFI to decide whether it is qualified to set up a branch. While a finite amount of additional time for reviewing the application of a bank established in another country may seem necessary in the PRC, it is hard to justify that the authority needs three times as long to examine the operation of an FFI, as it does for the branch of a PRC-established subsidiary or of a bank whose parent is located in another country. It appears that the three-year period simply represents an artificial limit on the capacity of FFIs to open branches in the PRC, thus putting FFIs in a less favorable position than domestic banks. With regard to the one-year interval period for the establishment of an additional new branch, the PRCs commitments to WTO state: within five years after accession, any existing non-prudential measures restricting ownership, operation, and juridical form of foreign financial institutions, including on internal branching and licenses, shall be eliminated. It is recommended that the PRC abolish Article 15 (1)(3) Rules by no later than January 2006, unless, of course, the measure can be justified on prudential grounds. As a strictly legal matter, it is unlikely that a WTO dispute panel would look sympathetically on the prudential argument, particularly in light of the PRCs reservation with respect to establishing local-currency operations. The PRCs schedule of
commitments incorporates a reservation that imposes the three, one-year intervals for foreign banks wishing to engage in local-currency operations. By doing so, a dispute panel is likely to conclude that the PRC acknowledged that this requirement is outside the scope of the prudential exception. Otherwise, no such reservation would be necessary. The panel would be likely to view the more comprehensive obligation cited above as governing, under the circumstances, thus obligating the PRC to eliminate Article 15 (1) (3) of the Rules by no later than January 2006.
I. Application Period
Under Article 19 of the Rules, the time limit for the PBC to make decision on accepting the application for establishment of an FFI is six months, while for DFIs, the time limit is three months 29 . This time difference is not significant, and perfectly reasonable as PRC authorities may need longer time to check all the materials submitted from an institution that is located abroad. For an applicant whose application for the establishment of a FFI has been rejected by the PBC, it may not refile in the same city within one year30, while for a DFI, the time limit is only six months31. In contrast, this additional period of time is more substantive and contributes to the unpredictability of the license application process. This different treatment has very little prudential basis, and it is suggested that it be eliminated.
J. Conditions to Operate in Local Currency There is a special provision under Section 38 of the Rules that imposes two specific conditions on foreign banks when they choose to operate in local currency. They must have practiced in the city where they wish to set up RMB business for more than three years. In addition, their institution in the affected city must have made a profit for two successive years before the application to operate foreign-currency business has been filed. These conditions are reserved under the market access section of the PRCs WTO Schedule of Specific Commitments in banking. The PRCs reservation in WTO schedules clearly protects it against any legal challenge that these stipulations are not consistent with its WTO obligations. However, such a measure clearly discriminates against foreign banks that wish to do business in local currency. The question is whether such a condition is necessary or whether the policy objective giving rise to it could be administered in a less burdensome way. Obviously, a principal burden on foreign banks is the specified number of years their individual branch must have operated profitably as a pre-condition to dealing in RMB business. It obviously
29 30 31
Article 17 of the Rules on Administration of Financial Institutions 1994. Article 20 of the Rules. Article 17 of the Rules on Administration of Financial Institutions 1994
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delays the period of time in which they could otherwise operate in both local and foreign currency. An initial question is whether such a rule is required at all. Should not the ordinary prudential rules governing foreign bank operations suffice? This would entail, perhaps, a business plan to demonstrate planned local currency operations, plus the usual requirements that the foreign bank hold RMB in safe and liquid instruments. These would appear to be the only appropriate requirements necessary for any bank operating in an environment in which the local currency is not convertible. There are a number of options the PRC could pursue that would make the existing restriction less burdensome, if special conditions are justified. One example would be to allow a profitability assessment based on the foreign banks overall operations in the PRC, rather than the performance of a specific branch or subsidiary operation in one city specified in the Rules. It would seem more appropriate to assess the banks overall performance in the PRC when judging whether to allow one of its branches to engage in local currency. The point is that there are other standard prudential measures to protect against the under-performance of a bank or any of its branches. Unless there are sound, prudentially-based answers to these questions, the only conclusion that can be drawn is that the PRCs regulatory policy has the effect of limiting the opportunity for foreign banks to compete in local currency business, such that it provides a level of protection for in favor of PRC banks. It could be said that Article 38 requirement described above is not the best supervisory policy. While protected under the PRCs existing Schedule of WTO Commitments, the rule may be subject of future negotiations, and PRC authorities may wish to review Article 38 with those factors in mind.
K. Form of Establishment According to article 2 of the Regulations, the forms of establishment of FFIs are as follows: solely foreign-funded banks; branches of foreign banks; joint venture banks; solely foreign-funded financial companies; joint venture financial companies. The Regulations and its implementing rules provide detailed requirements for establishing FFIs. In addition, the Sino-Foreign Equity Joint Venture Law requires that foreign enterprises
equity in a joint venture should not be less than 25%. This provision is expressed as a reservation to market access in the PRCs WTO Schedule of Commitments for all services, and is therefore protected from any legal challenge in the WTO. However, in practice, PRC authority has allowed new forms of establishment other than solely foreign-funded banks and joint venture banks. Before accession to the WTO, some foreign investors have been allowed participating equity in PRC domestic banks. For instance, the Asian Development Bank owns 3% equity in China Everbright Bank, the International Financial Company (IFC) owns equity in the Bank of Shanghai and Nanjing Commercial Bank, with 5% and 15% shares respectively. After the PRCs accession, more foreign investors have applied for making investments in PRC domestic banks. At present, PBC has approved the HSBC and Shanghai Commercial Bank Ltd, Hong Kong to hold equity interest in Shanghai Bank. Each of them holds 8% and 3% shares respectively. Moreover, the IFC has been approved to increase its equity in Nanjing Commercial bank to 7%. Furthermore, in December 2002, Citibank won approval to complete a minority acquisition in Pudong Development Bank, with 5% of its shares. And recently, the IFC acquired 12.4% of the shares in Xian City Commercial Bank. According to PBC officials, when a foreign banks equity in a domestic bank is less than 25%, the Regulations and the Rules will not apply, in other words, the nature of the bank is still a domestic bank; only when a foreign banks equity in a domestic bank reaches 25% or more, will the target bank be treated as a joint venture bank and the Regulations and the Rules will apply.32 The problem though, is not that PRC authorities allow foreign banks to hold less than 25% equity in domestic banks. It is the lack of transparency in approving these investments that would cause challenges. Currently, there are no provisions in the law or regulation on the conditions for making a more limited investment in a PRC bank. Approvals are made on a case-by-case basis, leaving a foreign bank, with an interest in making an investment in a domestic bank with less than 25% equity, with no specified rules by which to abide. It would be helpful if some appropriate rules are adopted, which would provide greater
32
According to article 4 of the Sino-Foreign Equity Joint Law, the proportion of the foreign investment in an equity joint venture
shall not be less than 25% of its registered capital.
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flexibility and predictability for foreign investors seeking such investment opportunities in banking. The policy objective should be to encourage more equity investment in PRC banks, providing them with a stronger capital position in an increasingly competitive market.
L. Single Law and Regulation for Foreign and PRC Banks In addition to the specific regulatory questions above, it is worth asking whether it is desirable for the PRC to retain separate laws governing banking for foreign and PRC institutions. This question, of course, must be addressed in the overall context of the PRCs emerging legal framework for banks. However, there are implications associated with WTO obligations, such as the greater transparency of the banking regime. Historically, it is understandable that such separation has been necessary as the PRC introduced a legal framework enabling foreign banks to operate within the country. However, the combination of subsequent regulatory change and the PRCs WTO commitments in banking has led to greater harmony in the regulatory treatment of foreign and domestic banks. Any consideration of such a step should assess whether regulations, rules, and any other measures can be collapsed into a single document, as would be the case for laws. It is advisable for the PRC authorities to undertake such a harmonization, so that there is a single law, governing the same regulations and rules, applying to both foreign and domestic banks. Of course, it would be necessary to include provisions that apply differently to foreign banks, but there is little reason why a single law could not accommodate these differences. Any such question should include practical considerations of whether the differences in treatment of foreign and domestic banks are so substantial that combining them into a single measure would accomplish little more than the production of an overly voluminous single law and associated regulations and rules. Thus, the effort to harmonize should bring the benefit of greater economy in laws and regulations, eliminating unnecessary redundancies In any event, the benefits of having a single law and set of regulations and rules governing all banks in the PRC potentially has considerable advantages, among which would be the improved transparency of the banking regime and overall predictability of the
system. Inevitably, its sections that treat foreign banks differently may give rise to calls by trading partners to bring the treatment of foreign banks into line with those of indigenous banks. However, this need not be a difficult problem for PRC authorities to manage, in the light of the basic rights it has extended to foreign banking institutions in its WTO commitments. The real issue probably rests more with administrative and process-related matters, where in too many instances it is necessary to impose different conditions on foreign banks. This is part of the calculus PRC authorities must make in deciding the efficacy of a single bank law and associated regulations and rules.
M.
Other Obligations in the PRCs WTO Banking Commitments
1.
Auto Financing
The PRCs WTO commitments provide full market access and national treatment
with respect to the ability of non-bank auto finance companies to establish a commercial presence within the PRC. These commitments entered into force upon WTO accession in 2001. On 3 October 2003, the CBRC promulgated the Rules on the Administration of Auto Finance Companies, which brings the PRC fully into conformity with its WTO obligations.
2.
Financial Leasing
The PRCs WTO commitments in banking included financial leasing. However, the
PRC entered a stipulation under Additional Commitments in the WTO banking schedule that provided that such an obligation would enter into force until domestic corporations were given authority to engage in financial leasing. At the time, there did not appear to be a government measure that provided for financial leasing. Indeed, the PRC had enacted such a measure in June, 2000, which effectively fulfilled this commitment (The Regulations on the Administration of Financial Leasing Companies (2000.6.30 PBC).
N. Countervailing considerations in assessing national treatment issues
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This report has raised several points where the PRC's current banking regime may present national-treatment problems under its WTO obligations. There are, however, other instruments that the PRC uses to provide foreign banks with more favorable treatment than is otherwise available to PRC banks. The question is how these instruments could be used to offset alleged national-treatment inconsistencies. For instance, the PRC's tax laws, at the national and sub-national level, are more generous to foreign banks than to PRC banks, which results in higher net revenues after taxes for the foreign banks. Income for FFIs is taxed at 15%, as opposed to 33% for DFIs. In addition, FFIs can be eligible for certain tax holidays, exemptions and abatement. Strictly from a WTO legal perspective, the more favorable tax treatment of foreign banks would not be regarded by a WTO panel as relevant in considering a possible national-treatment violation. Panels do not consider offsetting measures that may produce net benefits to foreign banks, when those measures have no specific relation to, for instance, capital requirements. The tax benefit would be viewed as a stand-alone instrument that a government has the right to extend or to remove on the basis of its own public policy considerations. WTO rules simply do not address the inherently sovereign right of a country to treat foreign goods and services more favorably than their own, provided that they are extended on a most-favored-nation basis. However, even if the revenue savings from the more favorable tax treatment is roughly equal to the larger branch capital requirements on foreign banks, the tax measure would not be considered as a factor that negates a discriminatory measure imposed for other reasons. The only possible basis on which a WTO panel might consider the relation of the tax to branch capital would be if the tax rate were calibrated on the basis of the higher branch capital required of the foreign banks. Yet, there is nothing to indicate that the two are not calibrated differently, to address different policy objectives. In an environment outside the legal construct of the WTO, however, the more favorable tax treatment may be used as a negotiating point with foreign governments, especially in the event a country or countries decide to challenge a PRC bank regulatory measure as being discriminatory. PRC authorities can remind these countries of the tax benefits the banks receive, and that the continued extension of these benefits may have to be reviewed in light of overall conditions. One can only speculate as to the possible
advantage that might bring, since foreign banks might be willing to give up the favorable tax breaks in exchange for the elimination of more costly regulatory requirements. However, the PRC can draw the link between these separate instruments in a way that may influence another country in its pursuit of WTO rights for banking.
O. Conclusion The PRCs commitments in banking generally are comprehensive and predictable in the way they have been set out in the Schedule of Specific Commitments in services. Where obligations could not be assumed at the time of WTO accession, the PRC usefully included staging periods that provide a predictable basis on which FFIs can realize banking opportunities in the PRC market. This discussion has tried to address some residual problems associated with the PRCs banking environment. The most significant of these is the cost of capital for a foreign-bank branch, in comparison with that both for PRC counterparts and in a crosssection of other countries. The conclusion of this study is that the level of these capital costs is not necessary and may hinder the development of a sound, competitive banking industry in the PRC. At the same time, a thorough analysis of branch capital requirements, in terms of their consistency with the PRCs national-treatment obligation under the WTO, leads to a conclusion that the broadest possible reading of the prudential exception contained in the Annex on Financial Services in the GATS probably would sustain the less favorable treatment the PRC extends in this specific area. Different conclusions have been drawn, however, in some other areas, where the prudential exception enters into consideration. It cannot be stressed enough that any effort to interpret the prudential exception is based on a measure of speculation, given the absence of any data that would further clarify the clearly broad scope of its language. In short, this is an assessment based on the history of standards used in WTO disputes. The authors of this provision intended that it be interpreted broadly, and this study has done so in assessing the PRCs branch capital requirements. The PRC banking authorities are encouraged to review their branch-capital requirements, because they currently impede the ability of an FFI to expand its business in
the PRC, compared with DFIs. Competition for capital among countries continues to grow, and the potential danger to the PRC is that capital-heavy foreign banks will invest in countries where the cost of capital is less expensive. This is not in the PRCs overall interest. As requested by the PBC, this analysis of foreign practice has covered as many areas as there are with data available, in the hope that it can be useful in establishing future regulatory behavior, now that the PRC has undertaken significant international obligations in banking through its WTO membership. Finally, should be observed that this analysis of the PRCs banking system, and the factual basis on which it was undertaken, was without the benefit of actual discussions with PRC authorities, despite efforts to hold them, on the various issues analyzed. Thus, the analysis drawn and the conclusions reached are exclusively on the basis of written material available to the project team. P. Epilogue on new legislation Changes in the licensing requirements for banks and their branches, as expressed in the revised Commercial Banking Law and the new Law on Banking Supervision, reflect a constructive move toward market entry based on professional skills and risk-management ability that is part of the spirit of the WTO accession agreement. The shift away from a licensing process heavily influenced by local social needs and the survival of incumbent banks will begin allowing a market mechanism to allocate banking resources to meet demand. Similarly, the recently changes in corporate taxation move toward a more balanced playing field, in favor of DFIs. This leaves more leeway, now, for a similar leveling of bank- and branch-capital requirements, which all participants will welcome.
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FINAL REPORT, SECTION IV CREDIT INFORMATION BUREAUS
IV. CREDIT INFORMATION BUREAU REGULATION * This section of the report has two parts. The first part sets forth the initial views of the ILI team on the draft credit information bureau regulations. The second part discusses the approaches several countries have taken in regulating credit information bureaus. A. Credit Information Bureau Regulations
1. Introduction
What follow are the ILI teams initial views on the draft credit information bureau regulations. On the whole, the draft regulations are very thorough and well thought out. They should help provide a good legal structure for the development and regulation of credit information bureaus in the PRC. The team provides comments on the draft regulations with some caveats. There are significant cultural and legal differences between the United States, EU countries and the PRC that may make it difficult to apply the lessons of any one market to the PRC draft regulations. To address this concern comparisons have been made with several other countries regimes, and numerous discussions have been held with PBC, CBRC and other agency officials in the PRC.
2. General Comments
The goal of the draft regulations is to ensure the availability of credit information necessary to facilitate the responsible provision of consumer and commercial credit, while protecting the privacy of individuals and guarding against the disclosure of commercial secrets. The tension between these two objectives is inherent in all credit reporting systems. Two broad comments concerning the manner in which the draft regulations address these goals should be made. (a) The Role of Competition One of the key tools the draft regulations adopt for accomplishing these goalsensuring the availability of accurate and affordable information and protecting privacyis to promote competition among credit bureaus. This is very important because competition creates market-
The content of this section was prepared by Robert Litan and Leonard Chanin with support from Fred Cate.
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based incentives for credit bureaus to be accurate, prompt, and innovative in their gathering and dissemination of credit information. While competition does not eliminate the need for regulation, experience shows that competition is an effective and efficient way to motivate credit bureaus to deliver high quality service at an affordable price. As an example of the effect of agency endorsement on competition in a related activity, the United States, effectively, has only three consumer and three bond ratings agencies. Interestingly, in passing the Sarbanes-Oxley Act 1 after the corporate scandals of 2002, the U.S. Congress instructed the Securities and Exchange Commission (SEC) to examine its policies toward the recognition of bond rating agencies, and recently the SEC announced that it would recognize a fourth bond rating agency. In addition, the SEC regulations dealing with ratings agencies are currently under review. There is no right answer as to how many credit bureaus are enough for competition. In one sense, there are problems with too many bureaus because there are clearly economies of scale in this type of business. However, having as few as two credit bureaus can eliminate any competitive effect, since duopolies can act very much like monopolies. In particular, because Article 15 explicitly envisions bureaus charging for their services on a market basis, the government should be concerned about avoiding a duopoly. Accordingly, three seems to be a minimum initial number of bureaus, but a larger number is likely preferable. In this connection, Article 10 of the draft simply provides that the establishment of credit information bureaus shall be under the guidance of the market needs, and fair and reasonable competition in the credit information business is encouraged. This is very general language and provides no indication of how many bureaus the government envisions licensing. It could be that more than two or three are envisioned, but this languageespecially the provision on market needscould be read to suggest only two. In addition, the high capital requirements in Article 11 and the provision in Article 14 prohibiting credit bureaus from engaging in business activities unrelated to credit information collecting business may create impediments to entities entering the credit reporting business. To
Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (2002) (codified as amended in scattered sections of
15, 29, 18, 11, and 28 U.S.C.).
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create more meaningful competition, these requirements should be reviewed, as well as, perhaps, the addition of supplementary language to Article 10 along these lines: To the extent possible, the [relevant government department] will endeavor to ensure that numerous, and at least three, credit information bureaus will be licensed to do business. (b) Limits on Collection and Use of Credit Information The draft regulations contain very broad definitions of credit information in Articles 2, 17, and 30, and then place strict limits on the collection and use of that information. For example, Article 18 requires the consent of natural persons before information about them can be collected, subject to the fairly limited exceptions in Article 19. Article 20 imposes additional limits on collecting certain types of information about natural persons. In addition, Articles 16, 26, and 35 impose limits on the use of credit information. The combination of the broad scope of the draft regulations, the requirement that information may be collected in most instances only with individual consent, and the limits on the use of that information, raise the possibility that the draft regulations may (1) impede the collection and use of relevant credit information and therefore limit the availability of that information for making accurate credit decisions, and (2) create unintended consequences by restricting information flows outside of the credit reporting context. U.S. law may offer a useful comparison. The Fair Credit Reporting Act (FCRA)2 defines the information to which the act applies similarly broadly, but the act imposes virtually no limits on the collection of credit information, and considerably fewer limits, when compared with the PRC draft regulations, on the use of that information. For example, the U.S. FCRA limits the use of credit information to a number of permissible purposes, but these are defined fairly broadly: In response to a court order; In accordance with the written instructions of the consumer to whom it relates; To a person who intends to use the information in connection with a credit transaction involving the extension of credit to, or review or collection of an account of, the consumer; To a person who intends to use the information for employment purposes;
Fair Credit Reporting Act of 1970, Pub. L. No. 91-508, 84 Stat. 1114 (codified at 15 U.S.C. 1681-1681v).
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To a person who intends to use the information in connection with the underwriting of insurance involving the consumer;
To a person who intends to use the information in connection with a determination of the consumers eligibility for a license or other benefit granted by a governmental instrumentality required by law to consider an applicants financial responsibility or status;
To a person who intends to use the information as a potential investor or servicer, or current insurer, in connection with a valuation of, or an assessment of the credit or prepayment risks associated with, an existing credit obligation;
To a person who otherwise has a legitimate business need for the information (a) in connection with a business transaction that is initiated by the consumer, or (b) to review an account to determine whether the consumer continues to meet the terms of the account; and
To a person who intends to use the information in connection with a prescreened offer of credit or insurance, unless the consumer has opted out of such prescreenings. In addition, information also may be shared in some circumstances with other parties
involved in the same transaction.3 Moreover, information from credit bureaus may be shared with affiliates and used for marketing, credit, insurance, and other transactions, if the consumer is given an opportunity to opt out of that sharing and does not choose to do so.4 Furthermore, banks and other institutions may use and share information that is deemed transaction or experience information between the consumer and the institution. 5 For example, a bank may use
information about an individual's loan with the institution for marketing or other activities. Moreover, such information may be shared with affiliated institutions for marketing or other activities. It is not suggested that the PRC follow the U.S. model. However, the PRC should consider whether the draft regulations create too restrictive an approach regarding the collection and use of credit information, and will create impediments to access to information. It also is worth
3
16 C.F.R. pt. 600, App., 603(f)-8.

15 U.S.C. 1681a(d)(2)(A)(iii). 15 U.S.C. 1681a(d)(2)(A)(i). The privacy provisions of the Gramm-Leach-Bliley Act limit the ability of financial
institutions to share nonpublic personal information with third parties. See 15 U.S.C. 6801 - 6809.
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considering whether the draft regulations exceed the requirements of the European Unions Privacy Protection Directive, which is considered by many countries to be the maximum level of protection needed.
3. Specific Comments
In addition to these two broad comments, there are a range of suggestions regarding specific provisions. Article 2See the comments on Chapter 5, below, regarding the definition of the term provider of collected credit information. Article 5Article 5 states that the government shall, in accordance, with law make public credit information obtained in the process of exercising their functions. Similar language is provided for enterprises. The phrase make public suggests that the information would be disclosed to the public generally. If this is the intent, it is not clear what kind of information would be made public and how broadly it would be made available. Perhaps it should be specified, because this language seems inconsistent with the privacy protections provided in other provisions of the draft regulations. Alternatively, if the draft regulations do not contemplate disclosing this information to the public generally, one might wish to consider the term provide access to instead of make public and to define in what fashion and to whom it may be provided. Article 8This Article specifies that the State makes differential administration toward credit information collecting businesses. This language is unclear, especially differential administration. It is assumed that the regulations concerning credit reporting regarding natural persons (Chapter Three) are to be administered separately from those regarding legal persons (Chapter Four). If this interpretation is correct, it might be beneficial to more clearly spell out this distinction. Article 10It was previously suggested that this provision be modified to state more specifically the importance of competition and the need for numerous, and at least three, credit bureaus to try to ensure meaningful competition. Article 11The general comments suggested that the high capitalization requirement may act as a barrier to meaningful competition. In particular, unlike the need to require capital for
banks that hold deposits for individuals and businesses, the PRC may want to consider whether it is necessary to mandate that credit bureaus maintain capital. Such requirements could impose unnecessary barriers to entry into the credit information markets, while other provisions, such as registration, appropriate security measures to safeguard information, requirements that qualified individuals operate credit bureaus, and oversight could ensure that the PRC interests are met. Article 14It was previously suggested that the restriction on other business activities that credit bureaus can engage in may act as a barrier to entry and meaningful competition. In the United States and several other countries, credit bureaus have been able to help spread the costs of collecting and managing credit information by engaging in a variety of activities not strictly related to evaluating creditworthiness. For example, U.S. credit bureaus provide services such as identity verification and may provide certain types of information to entities for marketing, fraud prevention, and other purposes. These activities are permitted by U.S. law, and not only help control costs in the core credit reporting business, but also allow credit bureaus to provide important services, including valuable services to the public. Article 16 would seem to prohibit additional uses of certain information gathered by credit bureaus. Article 14 (together with Article 16) presents two questions: (1) what uses should credit bureaus be permitted to make of information they collect; and (2) should credit bureaus be permitted to offer other types of services, unrelated to the provision of credit information. Restricting activities in which credit bureaus can engage could impede the ability of institutions to enter or successfully continue operating in credit information markets because bureaus may need to provide other information services or products to ensure short-or long-term success. Also, if confidential credit information is maintained separately from other information, it would appear that providing additional services would not conflict with privacy goals. Article 15The meaning of this Article is somewhat unclear. It is assumed that the reference to setting the price for credit reporting services on a market basis refers to allowing the market to establish the price for those services. Provided there is meaningful competition, this is a useful and desirable provision. (Although it might be noted that in the United States, the Fair Credit Reporting Act requires credit bureaus to provide free reports to individuals to whom
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reports pertain if those reports have been used as the basis for adverse action, such as the denial of credit.6) Article 18This Article provides that the collection of an individuals credit information is subject to the individuals consent. As an initial matter, the PRC may want to consider whether restrictions should be placed both at the point of collection and at the point of use. For example, if restrictions are placed at the point of collection, this could impair the ability of credit bureaus to gather data to establish empirical models that evaluate creditworthiness or to gather data for other important purposes. Placing restrictions solely on the distribution or use of information (aside from the restrictions on collecting certain data as provided for in Article 20) may satisfactorily protect individuals privacy, without unduly restricting the ability of credit bureaus to gather information for credit modeling and other purposes. If the PRC chooses to restrict the collection of data, such as by requiring the consent of individuals, such restrictions on collection can significantly limit the ability of credit bureaus to gather information because some people may not provide their consent to the collection of information. Furthermore, requiring consent, even for good information is likely to place
significant obstacles on the ability of credit bureaus to gather information, and could reduce the amount of information obtained. The PRC could make this issue clearer by amending Article 18 to provide phrasing such as the following: Unless otherwise stated in this Chapter, collection of a natural persons credit information. [additional language in italics]. The signature requirement in Article 18 could also restrict the ability of credit bureaus to gather information, and such a requirement may be unnecessary to achieve the privacy interests of the PRC. To the extent such a signature requirement may be imposed, clarification would be helpful on whether the signature requirement could be met by use of electronic signatures, such as in the case of communication by e-mail, or via a web-site. Article 19This Article provides exceptions to Article 18, but refers not only to collecting credit information, but also to employing credit information. This Article would appear to conflict with Article 26, which generally covers the use of credit information. It is
15 U.S.C. 1681j(b).
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unclear whether Article 19 is intended to apply both to the collection and the use of credit information. Article 19 also provides that credit bureaus may collect public credit information from administrative organizations. It might be helpful to expand this provision and provide that administrative organizations are required to provide convenient access to public credit information to help ensure that credit bureaus are able to easily obtain such information. In addition, the draft regulations might provide that these organizations are required to provide public credit information to all registered credit bureaus. It also is important for PRC to recognize that if organizations are able to impose a fee for information, this could effectively prevent credit bureaus from gathering that information. Finally, Article 19 might make clear that banks are not restricted under law from sharing information about their customers with credit bureaus, and could even state that banks are encouraged to provide such information to credit bureaus. Article 20Some of the information restricted by the Article may be used to verify the identity of persons. As a result, limitations on collecting certain identifying characteristics such as physical figure, and finger marks may impede the accurate identification of individuals who subsequently apply for credit. In the U.S., accurate identification of credit applicants is a growing concern because of the increase in identity theft and other fraud involving credit applications. Article 26This Articles provides the purposes for which information may be disclosed by credit bureaus. The PRC might consider whether it wishes to add a catch-all provision, which would permit disclosure of information for other legitimate transactions initiated by natural persons. For example, if a person rents a car or leases an apartment, the business may want to obtain credit information on that person. Chapter FiveThis chapter addresses the rights and interests of a provider of collected credit information, which is understood to mean the natural or legal persons to whom the credit information relates (i.e., the data subject). The term provider is potentially confusing because credit information may be provided by persons other than the data subject. Therefore, we suggest that the term provider of collected credit information be changed to subject or data subject throughout the regulations. If this title is intended to create rights or interests in persons other
than data subjects (i.e., third party data providers), it would be helpful if that were clarified and addressed separately.
Article 38This Article allows for individuals to inquire about their credit information, but it does not provide howwhether by phone, mail, or some other manner. It is suggested that credit bureaus be required to provide easy access to information in a credit file, by mail, or telephone, whichever is practical (since parts of the PRC may not have easy phone access). It also might be useful to consider specifying (1) time limits by which access must be provided; (2) whether fees may be charged for access and, if so, how they are to be determined or whether they are subject to a limit or government approval; and (3) whether credit bureaus have any affirmative duties to provide notice to individual of access or other legal rights. Article 40The phrase in time is ambiguous. It would be clearer if the Article referred explicitly to the time limit set in Article 41. Instead of in time, the phrase within the time limits specified in this Chapter might be used. Article 42It is questionable whether credit bureaus will be able to meet the requirement that they correct or delete information within three days after receiving notice from providers.
B. Survey of Treatment of Credit Bureaus in Other Countries
1. Introduction
This part of the report provides a brief discussion of the approaches used by several countries to regulate the collection and use of information by credit information bureaus. While this part of the report summarizes significant aspects of several countries laws dealing with the regulation of credit information bureaus, it does not provide a comprehensive analysis for such laws. Much of the information contained in this part of the report is derived from the books and article listed below.7 In addition, Appendix C compares restrictions, coverage, ownership and information-sharing of private credit information bureaus in five markets (Italy, Spain, Sweden, the U.K. and the U.S.).
See Credit Reporting Systems and the International Economy (Margaret Miller ed., MIT Press 2003); Inter-
American Development Bank, Competitiveness: The Business of Growth - Economic and Social Progress in Latin America,
2001 Report, Information in Financial Markets: The Role of Credit Registries, (Johns Hopkins University Press 2001); and
Tullio Jappelli & Marco Pagano, Information Sharing in Credit Markets: The European Experience (Centre for Studies in Economics and Finance, University of Salerno, Working Paper No. 35, 2000).
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There are two basic models or types of entities used to collect data about loan transactions -public credit registers (PCRs) and private credit bureaus. Many countries have established PCRs and also permit private credit bureaus to gather information about loans to businesses and individuals. These two types of entities have evolved in countries, in part, due to the different purposes they serve.
2. Public Credit Registers

In many European, Latin American, and other countries, the government collects information from banks about business loans and, in some instances, about individual loans through the use of PCRs.8 These data collection systems usually are managed by a countrys central bank or its bank supervisor. Data collection typically is limited to information supplied solely by banks about loan transactions. That is, the information collected is generally supplied by banks and not by other businesses or other sources. Because data reporting is mandatory, comprehensive data exist with respect to those institutions. Typically, only financial institutions that are supervised by a countrys central bank are required to submit data, thus, loan data is not collected from institutions, such as credit-card banks, if those entities are not supervised by the countrys central bank. This distinguishes data reported to private credit bureaus, as discussed in more detail below, which may collect data from a broader range of entities. Data collected by PCRs typically are intended to be used for bank supervisory purposes. That is, data is collected to assist the countrys central bank monitor bank lending activities and to ensure that institutions are not engaging in imprudent activities. In addition, however, in many European countries, banks that contribute data to PCRs are granted access to the information they supply. These institutions may use the information to monitor their own lending activities. most cases, third parties can not access this information. The type of data collected and the threshold for reporting information on specific transactions can vary significantly among countries. For many European countries, only data on commercial transactions are reported, and information on individual loans is not required to be provided. Furthermore, in light of the high threshold for reporting in some countries, many loans to small businesses are not reported by banks. For example, one of the highest thresholds in
8
In
Countries in Africa, Asia, and the Middle East also have established PCRs.
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Europe is in Germany, which only requires reporting of business loans of approximately US$1.7 million or higher. On the other hand, France requires reporting business loans that are
approximately US$120,000 or greater, but individual loans also are required to be reported. Countries likely establish a high threshold for reporting transactions due to the fact that the purpose for collecting information in some countries is to allow the countrys central bank to use the information to supervise bank performance, and is not collected to evaluate performance on individual loan transactions. In light of this purpose, there would be little reason to report data on small commercial loans. In addition, countries may not require reporting for small business loans, because this might require substantially more data to be provided with limited additional value to monitor bank performance. Moreover, requiring substantially more data to be reported might impose substantial burdens and costs on institutions, and managing and evaluating this additional data could result in greater complexity than might be warranted by the benefits derived from additional information. Countries also vary as to the type of information required to be reported. For example, Belgium requires institutions to report information only about loans in which the business is in default or in arrears. However, Belgium also requires information about individual loans to be reported, and data is not limited to those loans in default or in arrears. On the other hand, Italy requires reporting of business loans and guarantees, and does not limit reporting to transactions in default (although a higher threshold exists for reporting loans not in default). Thus, the type of data required to be reported by institutions in Europe can vary widely, with some countries requiring only negative information (defaults) to be reported, while other countries require the reporting of positive information for loans, as well as negative information. In addition, while many European countries require reporting of information solely about business transactions, others require that information be reported about both business and individual loans. Another important element about PCRs concerns the type of information available to banks. In general, PCRs do not provide access to information about individual loans, in contrast to the information available from private credit bureaus. However, in some countries, where
information is collected about individuals, that information may be made available to reporting institutions about a persons combined indebtedness with all reporting institutions. Because reporting information is mandatory, many European countries provide that if an institution fails to
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comply with reporting requirements, the central bank that supervises the institution may take administrative action, including the assessment of civil and criminal penalties for violations. While the United States does not maintain a PCR, banks are required to report a substantial amount of information to the central bank of the U.S. In particular, banks are required to provide information on a quarterly basis on a wide range of matters, including information about business and individual loans and other transactions, with the provision of both positive and negative information. This information is reported in an aggregate form by banks to the U. S. central bank. The central bank uses this information to perform supervisory functions, such as to monitor lending activities and trends for individual institutions. In addition, both banks and the public may access this information to review the performance of specific banks.
3. Private Credit Bureaus

Most European and Latin American countries, Canada, the United States, and other countries allow private companies to collect data on individuals and businesses.9 The degree of regulation of these companies varies among countries. Private credit bureaus may be established as independent companies, or may be owned by a consortium of banks. In Europe and other countries, private credit bureaus typically are incorporated as private businesses, owned by participating lenders.10 On the other hand, in the United Kingdom and the United States, credit bureaus are private businesses which are independent of lenders that provide information and entities that use information. The number of private credit bureaus in each
country varies, but typically there are one to three large bureaus. In the United States there are three main private credit bureaus and other countries, such as Germany and Brazil, for example, each have one predominant private credit bureau. The small number of bureaus is likely due to
9
While other countries allow private companies to collect data on individuals, many countries do not have private
credit bureaus.
10
The type of ownership of private credit bureaus can impact what information is gathered and shared.
For example, if a consortium of banks owns a private credit bureau, contributions and access to information could be limited to those entities, which could impact competition for credit and credit offerings. Alternatively, private credit bureaus may charge a higher rate to financial institutions that do not contribute data, as a means of providing incentives to contribute data.
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economies of scale, acquisition of smaller bureaus (when bureaus have been established for many years), technological developments (which have enhanced the ability of businesses to operate nationwide and worldwide), and the emergence of national (rather than local or regional) credit markets in many countries. In Europe and other countries, laws regulate the type of information that private credit bureaus can collect and also address data collection and retention practices, such as the length of time credit information about individuals may be kept by those bureaus.11 In general, private credit bureaus typically collect more types of information than is collected by PCRs. In addition, unlike PCRs, private bureaus typically collect information regardless of loan size and, thus, they collect information for transactions not obtained by PCRs. Much data obtained by private credit bureaus is provided by banks, although information also may be provided by other entities. For example, in the United States, private credit bureaus may collect information on individuals from finance companies, retail companies that extend credit, and credit card companies. In addition, in the U.S., private credit bureaus collect information from public databases, such as databases that maintain information on tax liens or property records. Moreover, many private credit bureaus obtain both positive information, such as loans granted, and negative information, such as loans in arrears or default. However, in some countries, such as Australia and Brazil, private credit
bureaus are not permitted to collect positive information, and may only collect negative information, such as information about past due accounts. Data accuracy can be a concern for private credit bureaus. Typically, laws do not require that banks or other institutions report information to private credit bureaus, but many countries have adopted laws that grant individuals the right to access credit information maintained by bureaus as one way of helping to ensure the accuracy of information. Private credit bureaus also can use other methods to try to ensure that information reported to them is accurate, but the effectiveness or utility of these methods is uncertain. For example, if persistent accuracy
problems occur with a provider of information, a bureau may temporarily limit a providers access to information. Furthermore, many bureaus have established divisions within the
11
Appendix A to this Report provides a comparison of the approaches taken by Italy, Spain, Sweden, the United
Kingdom, and the United States regarding regulation of private credit bureaus.
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organization that handle consumer questions and complaints to address issues about the accuracy of information, although this process may be established pursuant to laws of the host country. In Europe, many private credit bureaus collect information on both businesses and individuals, although a number of bureaus collect information only on commercial or individual transactions. In the United States, as a matter of practice, private credit bureaus collect
information only on individuals, and not on businesses. However, in the U.S., data on businesses is gathered by Dun & Bradstreet (D & B). Unlike credit bureaus in the United States that collect information on individuals from banks, D & B gathers information from vendors of goods and services to businesses, and obtains information from other sources. In Europe, the United States, and other countries, laws restrict the purposes for which information gathered by private credit bureaus may be used. These limitations and other privacy issues are discussed below.
4. Privacy Provisions
European countries, as well as several Latin American countries, have strong privacy laws that regulate the information-collection activities in which private credit bureaus may engage. In addition, laws also restrict the purposes for which information may be used and grant individuals the right to review the information which is maintained about them by private credit bureaus. European countries have strong privacy protections, in part, due to the European Unions Privacy Protection Directive. In general, the European Directive requires member states to establish laws regarding the collection, use, and disclosure of personal data about individuals. In addition, member states must enact laws granting persons the right to access information held by credit bureaus and the ability to correct inaccurate or incomplete data. However, a number of European countries have adopted laws that provide greater privacy rights than contained in the European Directive and, for example, may prohibit the collection of data about certain characteristics of individuals. For example, some European countries prohibit private credit bureaus from collecting information about the race, religion, and political views of individuals. European countries, the United States, and some Latin American countries also limit the distribution of information for certain purposes or with the consumers consent or written authorization. For example, in France (and Mexico), a consumers consent must be provided in
writing before information may be shared by a credit bureau with a third party. Furthermore, France requires entities that collect information about individuals to inform those individuals and obtain their consent every time data is added to their files. On the other hand, the United States and the United Kingdom have opted for less stringent privacy protections. For example, in both countries, a consumers prior consent is not required to collect or provide information about that person. While strong privacy measures may grant individuals greater control over information about them that is maintained by private credit bureaus, such restrictions also can limit individual benefits or choices. For example, if a country requires individuals to be notified, in advance, prior to the use of information, such requirements can result in individuals being provided with fewer credit choices because of the cost and burden associated with those requirements. Similarly, requiring written consent prior to obtaining credit information can limit the ability of a consumer to apply for credit by telephone. On the other hand, privacy protections can be associated with important benefits. For example, providing individuals with the right to access information maintained about them by private credit bureaus can be important to help ensure that individuals have confidence in the system used to obtain, distribute and use information. In addition, providing individuals with a right of access enables individuals to confirm that information is accurate and complete. From an individuals point of view, this can help ensure that credit decisions made by banks or others are based on accurate information. Furthermore, access rights can allow individuals to determine the identity of persons or companies that have received copies of information and to verify if access has been granted by private credit bureaus for a legitimate or permissible purpose. Also, in the United States and European countries, consumers are advised if certain negative action has been taken based on information in a consumers file. This notice seeks to ensure that consumers are alerted when information is used, for example, to decline a credit request and, thus, individuals may choose to obtain a copy of the information maintained by private credit bureaus to ensure the information is complete or accurate.
5. Status of Credit Information Rules and Practices in the PRC

As discussed in the first part of this report, the PRC has promulgated draft credit information bureau regulations. The ILI teams initial views on those draft regulations are set
forth in the first part of this report.
The regulations and draft policies incorporated in the
regulations also have been reviewed by others in the PRC, including by participants at the NPC and National Political Negotiation Conference held in March 2003. Similarly, in July 2003, a Workshop on Social Credit System Construction was hosted in Beijing by the Information Association of China. At that Workshop, credit regulations and related matters were discussed by participants, including by representatives of the PBC, National Development & Reform Committee, Legal Office of the State Council, Research Office of the State Council, and others. There are several cities and provinces in the PRC that are actively exploring and seeking to encourage the establishment of credit information systems. For example, the city of Shenzheng has established measures to promote the construction of credit information systems. (Administration Measures on Individual Credit Information Collection and Credit Assessment and Administration Measures on Enterprise Credit Information Collection and Credit Assessment.) Similarly, several cities (such as Beijing and Shanghai) and provinces (such as Zejiang, Fujian and Sichuan) are actively exploring ways to address the administration of credit information collection practices. Moreover, several governmental agencies and cities have begun or continue to encourage the establishment of credit information systems, described as Honesty and Credit Systems. Such systems seek to encourage businesses to establish credit administration systems and to incorporate credit information on individuals into credit information systems. In addition, the International Finance Corporation (of the World Bank) has established the China Project Development Facility, intended to assist in the development of private small and medium-sized businesses in Chengdu, Sichuan, and the project may contribute to the establishment of credit information systems.
C.
Conclusions and Recommendations Whether the PRC chooses to establish a public credit register and the manner in which the
PRC chooses to regulate private credit bureaus will reflect its values, culture, legal system, economic structure, economic and social goals, and the way in which it balances the ability of institutions to collect and provide credit information while protecting the privacy of individuals. Like many other countries, the PRC may decide to establish a PCR. If data is collected through a PCR or by use of another process, the collection of data from banks can help the PRC
perform important supervisory functions related to bank loan activities. If the PRC chooses to collect data from banks, the PRC might consider an approach similar to that used in the United States, which only requires banks to report aggregate data about loans and other transactions, including loan information on both businesses and individuals. Reporting of aggregate data by institutions should enable the PBC to monitor bank lending activities and should not raise privacy issues because no specific individuals or businesses would be identified. While the PRC could choose to require the identification of individual loan transactions, such an approach would compete with private credit bureaus, and could impact the creation of such bureaus. The PRC also could choose to grant institutions and third parties access to information reported. As the draft regulations contemplate, the PRC could take steps to encourage businesses to establish private credit bureaus. In general, the fewer restrictions imposed on the ability of private institutions to collect and distribute information, the greater the availability of information to banks and other entities, which can be used to make credit and other decisions. For example, in the United States and other countries, the availability of information has, in many instances, allowed banks and other institutions to base credit decisions on information rather than solely based on collateral. Access to information also can increase competition by enabling a greater number of institutions to have access to data at a low cost. Such competition can help to increase the availability of credit products to individuals and businesses, and access to information also can contribute to more effective decisions because decisions can be based on prior experiences of individuals and can permit the use of statistical models that can be powerful predictors of creditworthiness. Of course, the PRC, like other countries, will have to decide how best to balance access to information with individuals privacy interests. In the United States, businesses are granted few privacy rights, and such rights are typically granted to individuals. Nonetheless, granting rights to individuals and, as appropriate, to businesses, can be important to add credibility to credit collection systems, and to enable persons to verify if information is accurate or complete. Such access rights also can help to ensure that any decisions made are based on accurate information. Thus, the PRC may want to consider a minimal amount of regulation at this early stage of development of credit information systems, to encourage the formation of private credit bureaus. At the same time, the PRC may wish to establish provisions that grant individuals the ability to access credit information maintained by private credit bureaus, and the ability to require the
correction of inaccurate information. In addition, it may be appropriate to vest enforcement authority in a governmental agency to ensure that private credit bureaus comply with any requirements regarding individual access rights. The PRC will want to ensure, however, that any requirements adopted are not so extensive that they discourage the formation or development of private credit bureaus, or impose significant costs on bureaus, which could impact the use of information by banks or others. The PRC also may want to consider whether to grant to
individuals the ability to enforce any access or other rights in courts, as have been provided by other countries. The PRC will want to carefully tailor any such rights, particularly at this early stage in development of credit information systems, to ensure the exercise of such rights do not adversely impact the development of private credit bureaus. Whatever action the PRC chooses to take at the national level, it should be mindful that the development and growth of private credit bureaus also can be affected by local action. In particular, the PRC will want to be cognizant of the fact that if cities or provinces regulate activities of private credit bureaus, the burden can be significant and can impact the creation or development of credit information systems. That is, subjecting private credit bureaus to multiple and possibly contradictory rules by different municipal or other governmental bodies can impose significant costs and burdens on those entities and may detrimentally impact the creation or growth of private credit bureaus. Thus, it may be important for the PRC to try to ensure that entities are not subject to multiple different laws enacted by cities or provinces. Furthermore, the PRC may want to review any bank secrecy or similar laws that may unduly restrict the ability of institutions to share credit information with private credit bureaus. The PRC also will want to consider whether to require banks to report information to private credit bureaus. Voluntary reporting by banks is the approach taken by the vast majority of countries, and would provide the greatest flexibility and enable markets to determine what information will be reported. On the other hand, mandatory reporting can ensure that information will be made available to private credit bureaus, but can impose significant costs and burdens on institutions. Mandatory reporting also would ensure that large institutions will report information, since some may choose not to report due to concerns about competition for customers, if information is reported about those customers. However, mandatory reporting of information can freeze innovation and restrict flexibility for private credit bureaus, by fixing the type of information reported. While there is no specific recommendation on whether banks should be
required to report information to private credit bureaus, voluntary reporting would best allow credit information markets to develop naturally, and the PRC could choose to monitor developments and, if appropriate, in the future require reporting or provide incentives for banks to report information. Several factors, aside from the legal environment, can influence the development of private credit bureaus. For example, citizen mobility can have an impact on the need for information, when mobility is related to individuals establishing credit relationships with other financial institutions. That is, the greater the mobility, arguably, the more need for sharing of information. In addition, the evolution of national credit markets, rather than local or regional credit markets, can spur the need for private credit bureaus. Furthermore, the presence of a significant number of banks or other entities that make credit available, rather than a few dominant institutions, can influence the need for private credit bureaus because typically there will be a greater need for information (since those institutions may have little or limited experience with individuals). Thus, the degree of concentration of a credit market can affect the need for and development of private credit bureaus.
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FINAL REPORT, SECTION V AML GENERAL ANALYSIS
V.
ANTI-MONEY LAUNDERING GENERAL ANALYSIS AND RECOMMENDATIONS
A. Introduction The terms of reference for the anti-money laundering component of this project call for reviewing and recommending measures for strengthening the overall legal framework of the PRC to combat money laundering primarily through its financial institutions; recommending measures for strengthening the capabilities of the financial regulatory agencies and law enforcement authorities to effectively combat money laundering; and recommending measures for enhancing the capabilities of financial institutions to carry out effective due diligence through customer identification, suspicious transactions reporting and record-keeping. The purpose of this report is to: (a) assess the current state of the overall legal and institutional framework to combat money laundering in the PRC; (b) review the three new antimoney laundering legal instruments adopted by the PBC and, (c) make recommendations to strengthen the anti-money laundering legal and institutional framework in the PRC. These assessments are being made in the context of the main elements of the applicable international standards and by comparison with the best practices prevailing in other countries, primarily in Asia. In making international comparisons, this report refers to a selected group of key
jurisdictions whose circumstances and experience are more relevant to the PRC. This frame of reference for the assessment is also broadly consistent with the Methodology for Assessing Compliance with Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) Standard,1 which was jointly endorsed by the International Monetary Fund, the World Bank and the Financial Action Task Force (FATF) in late 2002, because this template will form the basis for future international assessments and evaluations of a countrys observance of AML/CFT standards.
B. Background to the Money Laundering Problem
* The content of this section was prepared by Herbert Morais and Guang Yang.
1
This document was jointly adopted by the IMF, World Bank, and FATF at the end of 2002.
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As the PRC becomes more integrated into the global economy with WTO membership and enjoys greater prosperity, the opportunities for commission of transnational financial crimes, such as money laundering, expand. Published reports indicate that money laundering in the PRC has increased to about Rmb 200 billion (US$ 25 billion) annually, representing about 2% of the nations GDP. This is roughly equivalent to the PRCs total export earnings (US$ 22.5-24.0 billion) in 2001-02. Such activity impedes the countrys ability to increase its foreign exchange reserves at a faster pace, which have grown at the rate of about US$ 10-12 billion annually since 19992. The country remains largely a cashbased economy, which helps explain why cash smuggling remains a serious problem. The Government is well aware of the seriousness of money laundering problem and appears intent on dealing with it, as evidenced by a series of legal measures that it has adopted in recent years, most notably in 2002-03. The PRC has not yet become a member of the Asia Pacific Group on Money Laundering (APG) (because of the unresolved issue of Taipei, China membership in APG) or the FATF, although Hong Kong, SAR, China is a member of both groups. It is important to note, however, that Hong Kongs membership preceded its reunification with the PRC in 1997.
C. Current State of the Legal and Institutional Framework
1. International Legal Commitments

The PRC has signed the three major international conventions dealing with money laundering: (1) the United Nations Convention Against Illicit Traffic in Narcotics Drugs and Psychotropic Substances 1988 (the Vienna Convention), which was the first treaty to call on all countries to criminalize money laundering of funds derived from drug-related offences; (2) the United Nations Convention Against Transnational Organized Crime 2000 (the Palermo Convention); and (3) the International Convention on the Suppression of the Financing of Terrorism 1999, which is relevant because money laundering is one of the known sources of terrorist financing. However, the PRC has so far only ratified the Vienna Convention and the
see Huang Ying, Money Laundering Challenges PRCs Economy, Peoples Daily Online, July 9, 2002
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Palermo Convention3. Early action on ratification of the other Terrorist Financing Convention would reinforce the PRCs international commitment to action on this problem. It is also recommended that the PRC sign and ratify the United Nations Convention Against Corruption, which was adopted in December 2003, as corruption is one of the major sources or predicate offences of money laundering. Like the other Conventions, this Convention also includes a specific provision calling on signatories to criminalize the laundering of the proceeds of corruption. Although the PRC is not a member of the APG or the FATF, discussions with Government officials confirmed that it fully supports international standards to combat money laundering, particularly the FATFs Forty Recommendations (FATF 40).4 It was less clear what specific steps the PRC has taken to implement the FATFs Special Recommendations on Terrorist Financing (FATF 8). In this regard, it is worth noting that a FATF team visited Beijing on 27-28 March 2003 for discussions with the Government on its efforts to fight money laundering in the context of FATF 40+8, to hear the PRCs comments on the then ongoing review of the former FATF 40 (1996 version), and to discuss future steps, including FATFs mutual evaluation procedures.
2. A National Law to Criminalize Money Laundering

A review of the various national laws, rules, regulations and administrative measures reveal that the PRC has made a good start in establishing the key pillars of a legal and institutional framework to fight money laundering. However, there is still much more that needs to be done to strengthen this legal framework by adhering more closely to the evolving international standards (e.g., FATF 40 + 8) and best country practices; spelling out more fully some of the general rules that have been promulgated; and training staff of key agencies, such as the PBC, and staff of the other financial institutions and the law enforcement authorities. Consistent with its international commitment under the Vienna Convention, the PRC explicitly criminalized money laundering under the Criminal Law of the Peoples Republic of
3 4
The National Peoples Congress ratified the Palermo Convention on 27 August 2003. The FATF 40 were substantially revised and re-issued by the FATF in late June 2003. All references in this report to FATF 40
will be to this latest 2003 document.
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China amended in March 1997 (hereinafter referred to as the Criminal Law). Under Article 191 of the Criminal Law, as amended in the Third Amendment of the Criminal Law on Dec. 29, 2001, any person who knowingly engages in laundering funds obtained from four predicate offences (drug trafficking crimes, crimes committed by organized crime groups, smuggling, or terrorist crimes) may be punished for the crime of money laundering. Money laundering is defined as covering the provision of fund accounts, conversion of property into cash or other financial instruments, transferring capital or accounts, remitting funds to foreign jurisdictions, and covering up or concealing the criminal origin of such funds. The language of the provision suggests that it would encompass acts of aiding and abetting, or attempting to commit, the offence. The penalty for the offence is 5-10 years imprisonment, plus a fine of not less that 5 percent but not more than 20 percent of the amount laundered. Where an entity commits the crime, the penalty is a fine imposed on the entity (the amount is not specified but presumably it is the same as for individuals) but only a maximum of 5 years imprisonment for those persons responsible unless the circumstances are serious (serious is not defined) in which case a maximum of 10 years imprisonment is allowed. The reason for the difference in penalties between individuals and entities is unclear. It is significant to note that Article 191 of Criminal Law defines the money laundering crime in the broadest terms to cover all persons or entities who (whoever) commit the acts specified in this provision. At the same time, however, Article 191 of the Criminal Law lists only four predicate offences. This falls short of international standards, which call on countries to apply the crime of money laundering to all serious offences with a view to including the widest range of offences (FATF 40, Recommendation 1). The Glossary attached to the FATF 40 lists twenty designated categories of offences that are recommended for inclusion as predicate offences under Recommendation 1. In this context, it may be noted that several other serious offences that are typically included as predicate offences in the anti-money laundering laws of other developed and Asian countries5 and Hong Kong, SAR, China are missing from Article 191 of the Criminal Law (e.g., cheating, fraud, embezzlement, kidnapping, corruption, extortion and blackmail, and sex-trafficking offences.). Therefore, Article 191 of the Criminal Law should be
These include the United States, the United Kingdom, Australia, New Zealand, Canada and several European countries, plus
Indonesia, Malaysia, Thailand, the Philippines and South Korea.
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amended to cover all serious offences or a longer list of predicate offences so as to more closely adhere to international standards and best country practices. Government officials, including those at the PBC, the MPS, and the SPP, acknowledge that the New Criminal Laws net needs to be cast much wider to capture several more predicate offences.6 Article 174 of the Criminal Law also makes punishable the establishment or operation of a commercial bank or any other banking institution without the approval of the PBC. It is not clear from the language of this provision that it would catch informal money-transmission services or alternative remittance systems. However, this provision was referred to by PBC officials as prohibiting illegal money-transmission activities; and, if this is the case, this provision should be amended to require the licensing and regulation of money-transmissions services as called for explicitly by FATF 40 (Recommendation 23) and FATF 8 (Recommendation VI). The crime stipulated in Article 174 of the Criminal Law is punishable by imprisonment of up to 10 years and a fine of between Rmb 20,000 to Rmb 500,000. The Criminal Law also contains authority under Article 191 for the Government to seize and confiscate proceeds and gains derived from crimes. Under the Criminal Procedure Law of the Peoples Republic of China (promulgated in 1979 and amended on March 17, 1996) and certain other regulations,7 the courts, the prosecution and the police are authorized to seize, freeze, and confiscate assets while a case is under investigation. A court order is not required. It is important to note, however, that these provisions are general in nature and apply to all crimes and have not been specially tailored to address some of the unique features faced in the money laundering situation such as the conversion of the proceeds of crime into other forms of assets, capital flight of such proceeds to other jurisdictions, protection of the rights of bona fide third parties, and confiscation without criminal conviction (civil forfeiture). Copies of the relevant provisions of the Criminal Law, referred to above, are set out in Appendix D.
See, e.g., Jiang Zhang, Basic Countermeasures Against Money Laundering Crime in PRC, paper presented at a Conference
on Combating Money Laundering and Financial Crimes, Vancouver, Canada, October 2000. Mr. Zhang is an official of the MPS.)
7
Principal among these are the Administrative Regulations for Financial Institutions on Assisting in Seizing, Freezing and
Confiscating Funds, issued by PBC in 2002; and Notification on Inquiring, Freezing and Seizing Bank Deposits of Enterprises, Entities and Organizations, issued by PBC, SPP and MPS in 1993.
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To sum up, the current national law that criminalizes money laundering consists essentially of two brief provisions in the general criminal code of the country. These two provisions only criminalize the laundering of proceeds from four predicate offences and establish penalties for them. The Criminal Law does not set up the detailed rules for closely regulating the conduct of financial institutions and other persons or entities to prevent money laundering nor does it set up an institutional framework for doing so. While Article 191 of the Criminal Law could usefully be amended to broaden and strengthen the criminalization of money laundering, the best long-term approach for the PRC to take is to promulgate a separate and comprehensive national anti-money laundering law at the Basic Law level, in line with international standards and best country practices.
3. The PBCs Regulation and Administrative Measures

Since 2000, the State Council, PBC, SAFE and the General Bureau of Customs have adopted a number of separate regulations and measures which, though not cast explicitly as antimoney laundering rules, began to lay the foundation for implementing a new anti-money laundering legal regime in the country. Among the more notable of these measures are the Notice on Management of Large-Value Cash Payments (issued by the PBC on August 15, 1997) and the Rules on Real Name for Opening of Individual Deposit Accounts (issued by the State Council on March 20, 2000). In the hierarchy of laws in the PRC legal system, these legal measures were adopted at a level of rule-making below that of a Basic Law, which is the highest form of law promulgated by the NPC. On September 17, 2003, the PBC issued the following regulation and administrative measures (hereinafter referred to as the three regulations), which became effective on March 1, 2003, establishing a set of anti-money laundering rules for financial institutions falling within the PBCs and SAFEs supervision. These three sets of rules also fall below the level of a Basic Law: (1) Regulation on Anti-Money Laundering for Financial Institutions (administered by PBC); (2) Administrative Measures for Financial Institutions Governing Large Value and Suspicious Renminbi Transactions (administered by PBC); and (3) Administrative Measures for Financial Institutions Governing Large Value and Suspicious Foreign Exchange Transactions (administered by SAFE).
The two Administrative Measures spell out the general prescriptions in the Regulation. A review of the above three regulations indicates that the PBC has made an excellent start in establishing the basic elements of a legal and institutional framework for closely monitoring financial institutions and their financial transactions so as to prevent and punish money laundering. These measures appear to cover the territory reasonably well in terms of broad adherence to the applicable international standards, notably FATF 40 (e.g., Recommendations 5-16) covering customer due diligence, reporting of large-value and suspicious transactions, record keeping, establishment of internal controls and systems, establishment of a regulatory supervision or financial intelligence role for the PBC, and a leadership role for the PBC in organizing and conducting due diligence training for financial institutions. However, the real test of the effectiveness of these new instruments will come from how well they are implemented. In this regard, there are several specific areas in which the new legal instruments could be strengthened to assure effective implementation pending the promulgation of a new national anti-money laundering law at the Basic Law level. Detailed comments on the PBCs three regulations are provided in Appendix D. The following is a summary of the key comments and recommendations for the Governments and the PBCs consideration: The definition of the money laundering crime used in Article 3 of Regulation on AntiMoney Laundering for Financial Institutions (hereinafter referred to as the AML Regulation) is somewhat at variance with Article 191 of the Criminal Law insofar as it adds other crimes to the list of four predicate offences. A lower-level regulation cannot alter a Basic Law, which is higher in status in the hierarchy of laws. This inconsistency with the Criminal Law could create problems or confusion in the implementation and enforcement of the Regulation. The most desirable solution is to amend Article 191 of Criminal Law to cover more predicate offences (as noted earlier); and, pending such amendment, the reference to other crimes should be deleted from Article 3. The requirements for customer due diligence and reporting of large-value and suspicious transactions for financial institutions are formulated in a very general manner. They need to be spelled out more fully in order to provide clear and precise guidelines to financial institutions and their staff on exactly how they are to comply with the new rules.
Specific guidance for this may be obtained from the detailed prescriptions set out in the following two key documents: (a) FATF 40, Recommendations 5-16 dealing with Customer Due Diligence and Record-Keeping (Recommendations 5-12) and Reporting of Suspicious Transactions (Recommendations 13-16); and (b) Basel Committee on Banking Supervision, Customer Due Diligence for Banks, dated October 2001. It is recommended that the PBC prepare and issue prescribed forms to all financial institutions, as done by several other countries 8 . It is understood that SAFE has issued guidelines and reporting forms on 18 March 2003. Examples of guidelines and prescribed forms may be found on the websites of the Hong Kong Monetary Authority, the Monetary Authority of Singapore, and FINTRAC Canada (to cite three examples). The definition of financial institutions in Article 2 of the AML Regulation covers only banking-type institutions. The FATF 40 definition of financial institutions includes thirteen categories of persons or entities that conduct business in or provide financial services. Within the framework of the PBCs powers, amendments would therefore be needed to cover such other entities as informal money-transmission services or alternative remittance systems, leasing companies, portfolio management firms and money changers. In addition, outside the PBC framework, separate regulations would be needed to also cover non-bank financial institutions, such as securities firms and insurance companies, which fall within the FATF definition of financial institutions. Finally, designated non-financial businesses and
professions (sometimes referred to as gatekeepers), such as casinos, real estate agents, dealers in precious metals and stones, lawyers, notaries, other independent legal professionals and accountants, and trust and company-services providers, who have increasingly attracted attention recently as providers of financial services, should be subject to the countrys antimoney laundering rules. As the laws and regulations governing financial institutions are tightened, money launderers are likely to seek alternative ways of laundering their funds
Notably, the United States, the United Kingdom, Australia, New Zealand, Canada, Singapore, Thailand, South Korea, the
Philippines and Hong Kong, SAR, China.
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outside the formal banking system. Therefore, these serious gaps in the current anti-money laundering legal framework should be filled quickly if the new laws are to be effective in fighting money laundering in all its forms. The confidentiality and bank secrecy rules stipulated in the Commercial Bank Law of the Peoples Republic of China (promulgated by the Standing Committee of the National Peoples Congress in 1995, hereinafter referred to as the Commercial Bank Law), Articles 29 and 30 will need to be revised to make clear that the reporting of large and suspicious transactions by financial institutions is exempt from those rules. There should also be an explicit new rule (safe harbor rule) granting immunity from criminal and civil liability for financial institutions and their staff reporting large and suspicious transactions when acting in good faith (see FATF 40, Recommendation 14). The requirement that financial institutions submit multiple reports of large and suspicious transactions to various agencies at various levels is undesirable. There is also a lack of symmetry in the reporting provisions among the three rules. This process should be simplified and streamlined to provide for a single line of reporting to an autonomous FIU, consistent with international standards (see FATF 40, Recommendation 26), in view of the highly specialized skills needed to analyze suspicious transaction reports, to coordinate action by all concerned agencies including law enforcement authorities, and to cooperate with the FIUs in other countries in the investigation and prosecution of money laundering cases, the freezing and confiscation of laundered assets, and the extradition of suspected money launderers. Nearly 70 countries have joined the Egmont Group of Financial
Intelligence Units. In the Asian region, Indonesia, Malaysia, the Philippines, South Korea, Singapore, Thailand and Hong Kong, SAR, China have established FIUs; and so have many developed countries such as the United States, Canada, the United Kingdom, Australia, New Zealand and several European states. A single reporting line will also better preserve the confidentiality of such reports and reduce the risk of tipping off. Pending the establishment of a national FIU, the PBC and SAFE will effectively serve as the FIUs for banking-type financial institutions. It is highly recommended that the PRC join the Egmont Group so as to benefit from its advice and technical assistance in establishing and strengthening its FIU.
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The penalties set out in the three regulations (e.g., fines and administrative sanctions) are much lower than those set out in Article 191 of the Criminal Law (which also provides for imprisonment), which is curious, and also inconsistent with and below international standards which call for the imposition of effective, proportionate and dissuasive sanctions, whether criminal, civil or administrative (see FATF 40, Recommendations 2 and 17) and the practice of many other countries.
As of March 2003, the PRC has bilateral judicial assistance agreements on criminal matters with 24 countries and extradition agreements with 15 countries. The PBC measures are rather thin on international cooperation and mutual assistance arrangements, which are critical to the success of any anti-money laundering program in view of the transnational characteristic of the money laundering crime which frequently involves the rapid movement and conversion of money or value between jurisdictions. Specific provisions to deal with this issue should be included in the law, in line with international standards and best practices.
None of the three regulations includes integrity standards or fit-and-proper tests to ensure that criminals or their associates are prevented from holding or being the beneficial owner of a significant or controlling interest or holding a management function in a financial institution) (see FATF 40, Recommendation 23).
Apart from the inclusion of terrorist crimes as a predicate offence, there is an absence of provisions to adhere to FATF 8 which calls, inter alia, for specific action to license and regulate alternative remittance systems, to closely monitor international wire transfers, and to regulate non-profit bodies like charities.
4. Institutional Arrangements
It is only seven years since the PRC first criminalized money laundering under the amended Criminal Law. No formal institutional arrangements were established in 1997, either in terms of establishing a centralized FIU or anti-money laundering agency or a regulatory framework to ensure that financial institutions and other persons or entities observed customer due diligence requirements or reported suspicious financial transactions in accordance with international standards like FATF 40. Thus, the responsibility for implementing Articles 191 and 174 of the Criminal Law rested primarily with the law enforcement authorities such as the MPS and the SPP.
The adoption of the three regulations represents a long overdue and welcome attempt to establish the foundations of an institutional framework to implement the anti-money laundering legal regime governing the countrys financial institutions. While general rules have been formulated, the detailed institutional arrangements to implement these three regulations are in the process of being established and are, therefore, still in a very rudimentary and planning stage. PBC is clearly giving priority to establishing the structure, organization, staffing and training elements of such arrangements. For a start, it has established an Anti-Money Laundering Unit in its Security Bureau, and a Payment Transactions Monitoring Division in its Payment and Settlement Office to analyze large and suspicious transaction reports. SAFE has also initiated similar arrangements, including the issuance of some guidelines and reporting forms in March 2003. With the adoption of these three rules, the PBC and SAFE now assume shared responsibilities for the prevention of money laundering in banking-type financial institutions supervised by them. It is too early to make any assessment of these institutional arrangements. What is clear, however, is that PBC and SAFE should closely coordinate their efforts to ensure that the new anti-money laundering rules are applied uniformly and with equal effectiveness. Furthermore, at this critical institution-building phase, PBC and SAFE would benefit greatly from early donor support in the training of their staff and in establishing needed new systems. At the level of the banking institutions, there is little evidence that most of the banks in the country, especially smaller banks, have been implementing customer due diligence requirements prior to the adoption of these three regulations. The meeting with the Bank of China officials (from its Legal and Compliance Department) was very encouraging insofar as it revealed that this major bank had taken several concrete internal measures to sensitize its staff on the problem, to conduct training programs, to issue a detailed Handbook on Money Laundering, to implement strict customer identification procedures and formats for reporting of large value and suspicious transactions, to maintain records for at least 5 years and to monitor its overseas branches compliance with PRC laws and the PBCs policies. The meeting with the CSRC confirmed that, although it has been aware of the money laundering problem and its potential for abuse in the securities industry, it has not yet taken steps similar to PBC to establish regulations for the sector. The CSRC had requested the Securities Industry Association (a self-regulatory body) two years ago to issue guidelines to its members but it was not aware of the issuance of any written guidelines. The CIRC did not respond to our
request for meetings. However, it is understood that, like the CSRC, the CIRC has also not taken any concrete steps yet to establish regulations for the insurance sector. At the law enforcement level, published reports indicate that about 70 money laundering cases are now under investigation but it was difficult to obtain confirmation about the number or status of these cases (including data on seizure of assets) due to confidentiality concerns on the part of the SPP. Given the very early stage of development of the institutional arrangements at the PBC, and the absence of or slow progress in this area at the other financial regulatory institutions mentioned above, it is clear that the staff of all these institutions would benefit greatly from the provision of training programs designed to familiarize their staff with the unique features of money laundering and the methods of detecting and preventing the crime.
D. Summary of Findings and Overall Assessment The PRC has a multiplicity of laws and regulations at all levels of the legal hierarchy touching on the prevention of financial crimes. This gives rise to a number of conflicting rules. Concrete information on law enforcement efforts (e.g., quantitative data on the number of cases investigated and prosecuted, and amount of assets seized or confiscated) to investigate and prosecute money laundering crimes is limited because of a reluctance to divulge confidential information. Nevertheless, there is a sufficient basis on which to make an assessment of the overall legal and institutional framework. Based on the findings, the following recommendations are presented for the consideration of the PRC Government, PBC and other concerned agencies:
1. Promulgation of a new Basic Law Against Money Laundering

The Government should give serious and urgent consideration to promulgating a new Basic Law Against Money Laundering that would target all persons and entities that provide financial services (and not just banking financial institutions) and that could potentially be used for money laundering. This means that such a Basic Law would cover not only banking-type financial institutions (as the three PBC regulations do) but also non-bank financial institutions (such as securities firms and insurance companies, leasing companies, informal money-transmission services or alternative remittance systems, and money changers), and any other persons and
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entities (non-financial businesses and professions, also known as gatekeepers) providing financial services that could pose a money laundering risk (e.g., casinos, real estate agencies, dealers in precious metals and stones, lawyers, notaries, other independent legal professionals and accountants, and trust and company service providers). The adoption of a higher-level Basic Law will have a number of distinct benefits: (1) It will clearly demonstrate the Governments determination to stamp out money laundering in all sectors; (2) It will place the level of law and regulation over money laundering and the financing of terrorism at the highest level in the legal hierarchy of PRC laws, thereby giving it more stature and importance. This will, in turn, reduce conflicts of rules between lower-level regulations and higher-level Basic Laws, as illustrated earlier. (3) With an overarching Basic Law, all concerned regulatory agencies (e.g., PBC, CBRC, SAFE, CSRC, CIRC, and the General Bureau of Customs) would be under a more explicit legal obligation to implement concrete measures to regulate their respective sectors by issuing Implementing Regulations tailored to their sectors as the PBC has already done. (4) Last, but not least, a new and comprehensive overarching Basic Law Against Money Laundering will enable the PRC to achieve full observance of all the relevant international standards including FATF 40, FATF 8 and the International Conventions. A new Basic Law Against Money Laundering must include the following key elements to meet international standards and follow best country practices: (1) Properly criminalize money laundering to cover all serious offences or a longer list of predicate offences, target all persons and entities that could potentially be used in money laundering, and stipulate effective, proportionate and dissuasive sanctions or penalties. (2) Establish more comprehensive preventive measures for all financial institutions and other persons and entities to implement effective customer due diligence procedures, report suspicious transactions, establish integrity standards for their officials, set up internal controls including audit, and train staff.
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(3) Waive bank secrecy rules and establish safe harbor rules to protect financial institutions and their staff from criminal and civil liability for reporting suspicious transactions. (4) Establish a single FIU to serve as a national center to coordinate, receive and analyze suspicious transaction reports, as has been done by nearly 84 other jurisdictions around the world. In addition, it would be desirable to establish an inter-agency coordination council or committee to ensure close policy and enforcement coordination among all concerned government agencies, especially the FIU, the law enforcement authorities, and the financial regulatory bodies. (5) Clearly stipulate and demarcate the responsibilities of the FIU and the law enforcement authorities for analysis, investigation, prosecution, confiscation, and international cooperation and mutual assistance with other countries. (6) Elaborate on the powers and procedures for freezing, seizure and confiscation of money laundering proceeds to deal with some of the unique problems faced in the case of money laundering investigations and prosecutions and provide for the protection of the rights of bona fide third parties. (7) Establish an effective financial regulatory and supervisory framework to closely monitor all financial institutions (i.e., not only banking institutions, but also securities firms, insurance companies, and other similar financial entities) and other persons and entities that provide financial services that could be misused for money laundering, arming them with effective sanctions that could be applied against both individuals and institutions. (8) Establish comprehensive provisions for international cooperation and mutual assistance with other countries, which is critical in view of the transnational characteristics of the money laundering crime. For the information and guidance of the PRC Government and PBC, a table is attached in Appendix D, setting out in outline form these key elements of an effective anti-money laundering legal and institutional framework. These key elements have been identified on the basis of: (a) all relevant international standards applicable to money laundering and the financing of terrorism, and (b) an international
comparison of national anti-money laundering laws (best practices) of the following selected key jurisdictions which have promulgated comprehensive national laws against money laundering and the financing of terrorism in the last few years: Developing Countries in Asia Hong Kong, SAR, China Indonesia Malaysia Philippines Singapore South Korea Thailand Developed Countries Australia Canada Japan New Zealand United Kingdom United States European Union countries
The following points should be kept in mind in reviewing the attached table: The key elements have been chosen to reflect all relevant international standards, notably FATF 40, FATF 8, the three International Conventions, and other applicable standards (e.g., the Basel Committee guidelines on Customer Due Diligence). The key elements have also been selected by reference to the relevant United Nations Model Laws, including the most recent UNODC Model Money Laundering, Proceeds of Crime and Terrorism Financing Bill 2003. The selection of key jurisdictions represents a good sample of recently-adopted anti-money laundering laws, which most closely approximate the international standards and country best practices. This sampling of key jurisdictions reveals a very wide range of legislative provisions, ranging from concise legislative texts (10-15 pages) to much more comprehensive laws (hundreds of pages), and from basic provisions to very detailed provisions. The shorter laws have generally been supplemented by the issuance of implementing regulations to elaborate on the general provisions of the basic laws. Given the wide range of legislative provisions and the level of detail in provisions, the task of making international comparisons on a provision-by-
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provision basis for each key element is a formidable one and would require much more time and analysis than is available under this project. The sampling of key jurisdictions has been chosen to blend the recent experience of both developing countries in Asia and the experience of major developed countries. On balance, the precedents chosen from Asia represent a more relevant and useful model for PRC since they are less complex on the whole and appear to be more suitable for a country that is in the early stages of establishing the foundations of an effective anti-money laundering framework. It is important to appreciate that the more sophisticated Western models are tailored to countries that have had a much longer tradition of legislation and financial regulation. We would strongly recommend the legislative models of Hong Kong, SAR, China, Malaysia, Philippines, Singapore, South Korea and Thailand as most relevant and appropriate for the PRC to follow. International country comparisons have not been possible for a number of the key elements (e.g., requirements relating to financing of terrorism, the regulation of designated non-financial businesses and professions, and the broadened definitions of financial institutions and predicate offences) as these requirements have only been very recently introduced by FATF 8 and the June 2003 revised FATF 40. Most countries are still in the process of implementing these new requirements. Thus, the table in Appendix D, provides international country comparisons in a broad brush manner. The jurisdictions that have been listed under international country comparisons should, therefore, be seen as those that have satisfied all or most of the key elements mentioned. The main differences between the different jurisdictions is largely in the level of detail or scope of coverage of the provisions. It may be assumed that most of these jurisdictions substantially meet the minimum requirements of the relevant international standards. A detailed provision-byprovision international country comparison analysis will require more time and analysis than is possible under this project.
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2. Interim Measures
Pending the promulgation of a new Basic Law Against Money Laundering, the following interim measures may be considered by the PRC Government and PBC: The Criminal Law should be amended to increase the scope of predicate offences from the present four offences to all serious offences or a longer list of predicate offences, in line with international standards (FATF 40, Recommendation 1) and best country practices. Whichever approach the PRC adopts, it should at a minimum include a range of offences within each of the designated categories of offences listed in the Glossary to FATF 40. Amend or suitably elaborate on the three PBC regulations as recommended. Other financial regulatory agencies, such as CRSC and CIRC, should be urged to move swiftly to adopt regulations and other measures similar to those adopted by the PBC, to fill the current serious gap in regulation over securities firms and insurance companies. The bank secrecy provisions in the Law on Commercial Banks (Articles 29 and 30) should be amended to provide an exemption for the reporting of large-value and suspicious transactions, and also to incorporate a safe harbor rule that would grant institutions and officials reporting such transactions immunity from criminal and civil liability when acting in good faith. Training of regulatory staff (e.g., of PBC, SAFE, CBRC, CSRC and CIRC) and staff of financial institutions will be critical to the successful implementation of the PRCs antimoney laundering legal framework. First priority should be given to training of the financial regulatory staff. Then, the excellent BOC model should be replicated in all other banks, especially the smaller banks. The Government, supported by the PBC, SAFE, CBRC, CSRC and CIRC, should also assist financial institutions (including non-bank financial institutions) in implementing training programs and internal control systems to prevent money laundering. Given the sheer magnitude of this task in the worlds largest country, serious consideration should be given to the use of video training materials to reduce costs and make training programs more appealing.
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The Government should seriously consider the provision of suitable incentives to financial institutions to cooperate more effectively, including making arrangements for the sharing the proceeds of seized and confiscated assets with them.
Current and future regulations should incorporate explicit provisions incorporating the FATF 8 Recommendations on Terrorist Financing, especially on the licensing and regulation of alternative remittance systems, closer monitoring of international wire transfers, and closer monitoring of non-profit bodies such as charities.
Given that public understanding and support is critical for the success of anti-money laundering programs, the Government should give high priority to undertaking outreach activities with civil society. Holding workshops and seminars in different regions or beaming special television documentaries would be helpful in this regard.
The Government should also develop stronger public-private partnerships in fighting money laundering. The private sector should be enlisted as a key ally in the fight against money laundering.
Given the strong transnational characteristics of money laundering, it is important for the Government to expand its bilateral cooperation and mutual assistance agreements to facilitate the investigation of money laundering cases and the seizure and confiscation of criminal proceeds, including arrangements for the sharing of seized and confiscated assets with other cooperating jurisdictions. However, the absence of such agreements in the meantime should not prevent voluntary cooperation in view of the common interest of all countries to stamp out money laundering.
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FINAL REPORT, SECTION VI AML SUPPLEMENT
VI. ANTI-MONEY LAUNDERING SUPPLEMENTARY GUIDE ON LAW DRAFTING A. Introduction This supplementary AML report is provided to give some guidance on the drafting of a comprehensive AML law for the PRC.
B. Need to amend Article 191 in the Criminal Law Characterized by complexity, diversity, concealment and high-tech instruments, the crime of money laundering not only involves banks and non-bank financial institutions, but relates to their employers and relevant persons of other industries. Considering the current state of anti-money laundering legislation in China 1 , the corresponding legal system is rather unsound and incompatible with the rampant crimes of money laundering. Therefore, it is necessary to amend Article 191 in the Criminal Law on the crime of money laundering as soon as possible, while the appropriate legislator should be the Standing Committee of the National Peoples Congress.
C. Specific comparison of anti-money laundering legislation
1. Anti-money laundering laws and institutions in the United States

(a) Legislation2 The United States has taken a pioneering role in criminalizing the activity of money laundering and enacting anti-money laundering legislation. Its anti-money laundering law, entitled the Bank Secrecy Act, was adopted by the Congress in 1970. The framework of anti-
* The content of this section was prepared by Guang Yang.

1
These are exemplified by provisions on the crime of money laundering in 1) the Article 191 of the Criminal Law as amended in
1997, 2) Regulation on Anti-Money Laundering for Financial Institutions implemented in 1 March 2003, 3) Administrative
Measures for Financial Institutions Governing Large Value and Suspicious Renminbi Transactions, 4) Administrative Measures for Financial Institutions Governing Large Value and Suspicious Foreign Exchange Transactions, the previously issued 5) Notice on Management of Large-Value Cash Payments (August 1997) and 6) Rules on Real Name for Opening of Individual Deposit Accounts, and 7) The Law of PBOC amended on December 27, 2003
2
This does not include reference to the Patriot Act of 2002, which extends and redefines many aspects of previous laws.
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money laundering legislation in the United States consists of anti-money laundering laws enacted by the Congress, bundles of anti-money laundering regulations drafted by relevant governmental departments, and operation guidelines, conduct codes and business manuals adopted by the relevant regulatory authorities, such as Federal Reserve, Federal Deposit Insurance Bureau, SEC, Comptroller of the Currency and Postal Service. (b) Penalties for money laundering (1) Laundering of monetary instruments (US Code Title 18, Section 1956) Whoever, knowing that the property involved in a financial transaction represents the proceeds of some form of unlawful activity, conducts or attempts to conduct such a financial transaction, which in fact involves the proceeds of specified unlawful activity - (A) (i) with the intent to promote the carrying on of specified unlawful activity; or (ii) with intent to engage in conduct constituting a violation of section 7201 or 7206 of the Internal Revenue Code of 1986; or (B) knowing that the transaction is designed in whole or in part - (i) to conceal or disguise the nature, the location, the source, the ownership, or the control of the proceeds of specified unlawful activity; or (ii) to avoid a transaction reporting requirement under State or Federal law, shall be sentenced to a fine of not more than $500,000 or twice the value of the property involved in the transaction, whichever is greater, or imprisonment for not more than twenty years, or both. Whoever transports, transmits, or transfers, or attempts to transport, transmit, or transfer a monetary instrument or funds from a place in the United States to or through a place outside the United States or to a place in the United States from or through a place outside the United States - (A) with the intent to promote the carrying on of specified unlawful activity; or (B) knowing that the monetary instrument or funds involved in the transportation, transmission, or transfer represent the proceeds of some form of unlawful activity and knowing that such transportation, transmission, or transfer is designed in whole or in part - (i) to conceal or disguise the nature, the location, the source, the ownership, or the control of the proceeds of specified unlawful activity; or (ii) to avoid a transaction reporting requirement under State or Federal law, shall be sentenced to a fine of not more than $500,000 or twice the value of the monetary instrument or funds involved in the transportation, transmission, or transfer, whichever is greater, or imprisonment for not more than twenty years, or both. For the purpose of the offense described in subparagraph
(B), the defendant's knowledge may be established by proof that a law enforcement officer represented the matter specified in subparagraph (B) as true, and the defendant's subsequent statements or actions indicate that the defendant believed such representations to be true. Whoever, with the intent - (A) to promote the carrying on of specified unlawful activity; (B) to conceal or disguise the nature, location, source, ownership, or control of property believed to be the proceeds of specified unlawful activity; or (C) to avoid a transaction reporting requirement under State or Federal law, conducts or attempts to conduct a financial transaction involving property represented to be the proceeds of specified unlawful activity, or property used to conduct or facilitate specified unlawful activity, shall be fined under this title or imprisoned for not more than 20 years, or both. In addition, Whoever conducts or attempts to conduct a transportation, transmission, or transfer is liable to the United States for a civil penalty of not more than the greater of the value of the property, funds, or monetary instruments involved in the transaction; or $10,000. (2) Engaging in monetary transactions in property derived from specified unlawful activity (US Code Title 18, Section 1957) Whoever, in the circumstance that the offense takes place in the United States or in the special maritime and territorial jurisdiction of the United States; or that the offense under this section takes place outside the United States and such special jurisdiction, but the defendant is a United States person, knowingly engages or attempts to engage in a monetary transaction in criminally derived property of a value greater than $10,000 and is derived from specified unlawful activity, shall be punished with a fine under title 18, United States Code, or imprisonment for not more than ten years or both; or the court may impose an alternate fine to that imposable under paragraph (1) of not more than twice the amount of the criminally derived property involved in the transaction. (3) Relevant provisions on record-keeping (US Code Title 12) Title 12 in the US Code acknowledges the considerable utility value of records kept by commercial institutions for criminal, tax and legal investigation. It requests financial institutions to register and report the changes in ownership, control and management of capital.
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Civil penalties on violations under this title (Section 1955): For each willful or grossly negligent violation of any regulation under this chapter, the Secretary may assess upon any person to which the regulation applies, or any person willfully causing a violation of the regulation, and, if such person is a partnership, corporation, or other entity, upon any partner, director, officer, or employee thereof who willfully or through gross negligence participates in the violation, a civil penalty not exceeding $10,000. In the event of the failure of any person to pay any penalty assessed under this section, a civil action for the recovery thereof may, in the discretion of the Secretary, be brought in the name of the United States. Criminal penalty under this title (Section 1956): Whoever willfully violates any regulation under this chapter shall be fined not more than $1,000 or imprisoned not more than one year, or both. (4) Relevant provisions on reporting system (US Code Title 31) Civil penalties under this title (Section 5321):
A domestic financial institution, and a partner, director, officer, or employee of a domestic financial institution, willfully violating this subchapter or a regulation prescribed under this subchapter (reporting obligation) is liable to the United States Government for a civil penalty of not more than the greater of the amount (not to exceed $100,000) involved in the transaction (if any) or $25,000;
The Secretary of the Treasury may impose an additional civil penalty on a person not filing a report, or filing a report containing a material omission or misstatement. A civil penalty under this paragraph may not be more than the amount of the monetary instrument for which the report was required. A civil penalty under this paragraph is reduced by an amount forfeited;
A person not filing a report in accordance with the provisions of this subchapter is liable to the Government for a civil penalty of not more than $10,000;
The amount of any civil money penalty imposed on foreign financial agency transaction violations shall not exceed the amount (not to exceed $100,000) of the transaction; or $25,000;
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In the case that a foreign financial agency fails to report the existence of an account or any identifying information required to be provided with respect to such account, the amount of any civil money penalty imposed shall not exceed an amount (not to exceed $100,000) equal to the balance in the account at the time of the violation; or $25,000;
The Secretary of the Treasury may impose a civil money penalty of not more than $500 on any financial institution that negligently violates any provision of this subchapter or any regulation prescribed under this subchapter. If any financial institution engages in a pattern of negligent violations of any provision of this subchapter or any regulation prescribed under this subchapter, the Secretary of the Treasury may, in addition to a fine of $500, with respect to any such violation, impose a civil money penalty of not more than $50,000 on the financial institution;
Criminal Penalty Not Exclusive of Civil Penalty. A civil money penalty may be imposed with respect to any violation of this subchapter notwithstanding the fact that a criminal penalty is imposed with respect to the same violation. Criminal penalties under this title (Section 5322):
A person willfully violating this subchapter or a regulation prescribed under this subchapter shall be fined not more than $250,000, or imprisoned for not more than five years, or both;
A person willfully violating this subchapter or a regulation prescribed under this subchapter, while violating another law of the United States or as part of a pattern of any illegal activity involving more than $100,000 in a 12-month period, shall be fined not more than $500,000, imprisoned for not more than 10 years, or both. (c) Anti-money laundering institutions in the United States
According to legal provisions and authorization, anti-money laundering institutions in the United States mainly consist of Department of Treasury, Department of Justice, Internal Revenue Service, FBI, US Postal Service, Bureau of Customs and Border Control, Bureau of Alcohol, Tobacco and Firearm and Explosives, and Bureau for International Narcotics and Law Enforcement Affairs. In accordance with their functions and authorizations provided by laws,
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these institutions respectively investigate, prosecute and enforce (seize, confiscate and fine) the cases involving the action and crime of money laundering within their areas of authority.
2. Anti-money laundering legislation and institutions in Thailand

(a) Legislation Legislation on anti-money laundering in Thailand originated in May 1994. The Anti-Money Laundering Act was approved by the Thai Cabinet in April 1995, and subsequently passed by the National Congress in March 1999. In August that year, the Act came into effect and began to be implemented. Pursuant to the Act, ten administrative rules have been enacted in Thailand. Besides strict provisions on the definition of money-laundering, predicate offences, applicable subjects, seizure of illegitimate benefits and confiscation, the Thai Anti-Money Laundering Act adopts common practices and international standards of the UK, USA and relevant international organizations and provides relatively explicit operational guidance. Any transaction that has one or more of the following characteristics should be considered as a suspicious transaction: 1) extraordinary complexity; 2) the transaction is not economically manageable; 3) the transaction can be reasonably believed to evade the Anti-Money Laundering Act; 4) the transaction involves crimes stipulated in the Act. Conferring definite anti-money laundering functions and obligations on financial institutions, the Anti-Money Laundering Act also takes gatekeepers (professionals such as lawyers, accountants, auditors and tax counselors into consideration.
Primary provisions of the Money Laundering Control Act
The Act explicitly sets forth the definition of money laundering: any person who transfers, accepts a transfer of or converts the property connected with the commission of an offence or acts in any manner whatsoever for the purpose of concealing or disguising the origin of the property or the connection of the property with predicate crimes prescribed in certain regulations shall be said to commit an offence of money laundering. Predicate offenses in the Act means any offence relating to narcotics, sexuality (such as prostitution and trafficking in women and children), public fraud, embezzlement of public funds, malfeasance in office, extortion or blackmail and tax evasion. The Act applies to offence of money laundering committed by Thai
nationals and any other offender who has a residence or provisional domicile in Thailand, even if the offence is committed outside but has consequences within Thailand. Thus, an offence of money laundering subject to the Act may take place beyond the border. (b) Penalties The Act is also applicable for complicity, principal, conspiracy and the attempt to commit an offence of money laundering. Any person who commits an offence of money laundering shall be liable to imprisonment for a term of one to ten years or to a fine of twenty thousand Baht to two hundred thousand Baht or both. Any juristic person who commits offences shall be liable to a fine of two hundred thousand Baht to one million Baht, while its directors and managers are liable to criminal penalties for the offences committed by the corporations or agencies. In the case that governmental officials engage in the offences of money laundering, they would be punished with criminal penalties twice of the normal ones. Offences committed by a member of the Money Laundering Control Board or by the Transaction Committee in the Office of Money Laundering Control or by a high level officer in the Office of Money Laundering Control shall be liable to triple normal criminal penalties. In addition, any person who refuses to cooperate or provide false information in investigations for offences of money laundering shall be subject to corresponding criminal liabilities. (c) Anti-money laundering institutions in Thailand The Anti-Money Laundering Supervisory Board. It is a national anti-money laundering institution headed by the Prime Minister and constituted by staff from various departments of the Thai government. Its member includes: Minister of the Treasury, Executive Director of the Ministry of Justice, Grand Justice, Nazim of the Royal Police, Director of the Office of Drug Control, Director of the Office of Finance Policy, Minister of Insurance, Minister of Land, Minister of Customs, Minister of Internal Revenue, Minister of Treaty and Legal Affairs, President of the Bank of Thailand, Chairperson of the Thai Banking association, Commissioner of Securities Exchange Commission, and other non-governmental academics and lawyers. Under the Anti-money Laundering Supervisory Board, there is a standing administrative body the Anti-Money Laundering Office. The General Secretary of the Office is nominated by
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both the Senate and House of Representatives and appointed by the King. The main functions of the Anti-Money Laundering Office are to:
! ! !
Take rigorous and effective measures to crack down on the crime of money laundering; Collect and analyze relevant financial data and information; Lead, coordinate, guide and assist various departments of the government and nongovernmental organizations to undertake anti-money laundering missions;
! ! !
Cooperate with international organizations and inter-governmental enforcement bodies; Train the public to cultivate a clear anti-money laundering conscience; and Use appropriate modern information technologies to combat the crime of money laundering.
Major powers of the Office of Money Laundering Control:

! ! !
Oversee the smooth implementation of Anti-Money Laundering Act; Initiate anti-money laundering actions; Operate in the name of national financial intelligence unit (cooperating with the Bank of Thailand) in an equivalent way to USFINCEN (USA) and AUSTRAC (Australia) to collect and analyze information obtained under the reporting system prescribed by law;
Share financial information with other countries and investigate the persons enriched by proceeds obtained from crimes committed overseas and criminals concealing their illegal wealth within the territory of Thailand;
Use electronic surveillance system and search evidence of money laundering in probable places;
Confiscate illegitimate assets along with the Securities Exchange Commission; the Commission is entitled to search and seize suspicious capital and assets;
! !
Preserve, manage and dispose captured assets; Propose policies to the Cabinet through the Anti-Money Laundering Supervisory Board in accordance with laws, regulations and procedures;
Provide anti-money laundering assistance and support to other organizations (either public or private organizations); and
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!
Sponsor national lectures for local enforcement authorities and disseminate anti-money laundering news and information to bring up well-informed public groups that may provide backup.
3. Anti-money laundering legislation and institutions in Philippines

(a) Legislation The Philippine Anti-Money Laundering Law is an act amending the Act of 1960, and is known as the Anti-money Laundering Act of 2001 (hereinafter, the Act). The Act was adopted by the Senate and House of Representatives and signed by the President of Philippines to take effect on September 29, 2001. The Philippines have as many as 19 anti-money laundering laws and regulations, including criminal law, administrative rules, presidential orders and ordinances. Generally speaking, the essential provisions of anti-money laundering laws and regulations in the Philippines are:

Stipulations for the crime of money laundering; Jurisdiction of money laundering cases; Indictment of the crime of money laundering; Establishment of Anti-Money Laundering Committee and its executive body by the state; Prevention of money laundering (identifying customers, preserving records and reporting suspicious transactions);
Freezing currency instruments and assets; Addressing inquiries to banks by the authorities; Clauses of confiscation; Judicial assistance among countries; Penal clauses (punishment for the act and crime of money laundering, sanctions for not keeping records as prescribed by law, falsified reports, violation of secrecy provisions). (b) Penalties
It is provided in Section 4 paragraph (a) that any person knowing that any monetary instrument or property represents, involves, or relates to the proceeds of any unlawful activity,
transacts or attempts to transact said monetary instrument or property, should be liable to seven to fourteen years imprisonment and a fine of not less than three million Philippine Pesos but not more than twice the value of the monetary instrument or property involved in the offense. According to Section 4 paragraph (b), any person knowing that any monetary instrument or property involves the proceeds of any unlawful activity, performs or fails to perform any act as a result of which he facilitates the offense of money laundering referred to in paragraph (a) above, shall be punished with the penalty of imprisonment from four to seven years and a fine of not less than one million five hundred thousand Philippine Pesos but not more than three million Philippine Pesos. Section 4 paragraph (c) provides that any person knowing that any monetary instrument or property is required under this Act to be disclosed and filed with the Anti-Money Laundering Council (AMLC), fails to do so, shall be liable to imprisonment from six months to four years or a fine of not less than one hundred thousand Philippine Pesos but not more than five hundred thousand Philippine Pesos, or both. In accordance with Section 14 paragraph (d) of the Act, a failure to keep records is subject to the penalty of imprisonment from six months to one year or a fine of not less than one hundred thousand Philippine Pesos but not more than five hundred thousand Philippine Pesos, or both. Any person who, with malice, or in bad faith, report or files completely unwarranted or false information relative to money laundering transaction against any person shall be liable to a penalty of six months to four years imprisonment and a fine of not less than one hundred thousand Philippine Pesos but not more than five hundred thousand Philippine Pesos, at the discretion of the court, provided that the offender is not entitled to avail the benefits of the Probation Law. If the offender is a corporation, association, partnership or any juridical person, the penalty shall be imposed upon the responsible officers, as the case may be, who participated in the commission of the crime or who shall have knowingly permitted or failed to prevent its commission. If the offender is a juridical person, the court may suspend or revoke its license. If the offender is an alien, he shall, in addition to the penalties herein prescribed, be deported without further proceedings after serving the penalties herein prescribed. If the offender is a
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public official or employee, he shall, in addition to the penalties prescribed herein, suffer perpetual or temporary absolute disqualification from office. Any public official or employee who is called upon to testify and refuses to do the same or purposely fails to testify shall suffer the same penalties prescribed herein. It is also stipulated in Article 9 paragraph (c) that breach of confidentiality shall be punished with imprisonment ranging from three to eight years and a fine of not less than five hundred thousand Philippine Pesos but not more than one million Philippine Pesos. In the circumstance that the mass media violates the obligation of confidentiality, the journalist, author, publisher and its president, manager and editor-in-chief who are responsible for the violation shall be subject to criminal penalties under the provisions of the Act. (c) Anti-money laundering institutions in the Philippines The government of the Philippines sets up an Anti-Money Laundering Committee to lead anti-money laundering work in this country. The Committee is chaired by the President of the BSP (the central bank of the Philippines) and consists of the Commissioners of Insurance Commission and Securities Exchange Commission and organizations and staff concerned. The Philippine Anti-Money Laundering Committee establishes a subordinate secretariat with the General Secretary as its administrative officer who has 5-year tenure. Nominees for the position of General Secretary should have a Philippine law license, be at least 35 years old and be of favorable character and morals. All members of the secretariat must have worked with the Insurance Commission, Securities Exchange Commission or the BSP in specialized and tenured positions for at least 5 years. The Philippine government has also instituted a Parliamentary Supervision Committee. The Committee consists jointly of 7 senators and 7 representatives from the House. Senators are appointed by the moderator according to the proportion of parties or political alliances. There must be two members to represent the minor parties. Members of the House have to be nominated by the Speaker of the House and minor parties should similarly be represented by at least two members. The Supervision Committee monitors work on anti-money laundering.
D. Recommendations on amendment of existing laws

It should be noted that the Chinese government has promulgated the modified the PRC Law of the Peoples Bank Of China.3 Article 4 in the Law entitles the PBOC to carry out following duties: Article 4.10 requires it to lead and deploy anti-money laundering work in financial sectors and be responsible for capital surveillance; Article 32 provides that PBOC has the authority to inspect and supervise various actions of financial institutions and other entities and individuals; and Article 4.9 mandates it to take measures to implement relevant regulations against money laundering. As far as the two paragraphs of Article 4 are concerned, flaws still persist in the amended law. First of all, the anti-money laundering functions of PBOC remain limited to financial sectors and without covering alternative remittance systems and other entities. Moreover, the provisions are rather over-simplified and impracticable. In addition, anti-money laundering functions omit such aspects as collecting and analyzing suspicious transactions and financial intelligence. Thus, for enabling new anti-money laundering laws to effectively combat money laundering, serious loopholes within the legal framework of anti-money laundering must be filled up as soon as possible. On the basis of commitments made by the PRC government when signing the Vienna Convention, the Palermo Convention and 1999 International Convention on the Suppression of the Financing of Terrorism, without prejudice to domestic legislative principles and judicial procedures, China should bring its criminal laws against money laundering to even more compliance with relevant international standards and best country practices of anti-money laundering legislation. The PRC and PBC may consider appropriately amending the Article 191 on the offence of money laundering in the Criminal Law before the promulgation of a more comprehensive and higher level anti-money laundering law. The Criminal Law should be amended to increase the scope of predicate offences from the present four offences to all serious offences or a longer list of predicate offences, in line with international standards (FATF 40, Recommendation 1) and best country practices. Whichever approach the PRC adopts, it should at a minimum include a range of offences within each of the designated categories of offences listed in the Glossary to FATF 40.
amended in accordance with the Decision on Amendment of the PRC Law of the PBOC passed by the Standing Committee of
the Tenth National Peoples Congress on December 27, 2003
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The Criminal Law should penalize the act of acquiring, possessing and using illegal gains as the crime of acquiring, possessing and using unlawful gains on the basis of three stages that constitute the whole process of money laundering, that is, stage of deposit, stage of isolation and stage of transformation. Article 191 of the Criminal Law merely takes the first two stages into consideration, while leaves the third stage untouched.4 The onus of proof should be reversed regarding the lawful origin of alleged property for the crime of money laundering. Referring to the provision in Article 395 in the Criminal Law on huge amounts of property with unidentified sources, proceeds from activities of money laundering must be so explicitly defined that, if the property cannot be proven as derived from lawful origins, it should be treated as illegal gains and be forfeited as such.5 The definition of financial institutions in Article 2 of the AML Regulation covers only banking-type institutions. It is better to amend it to cover such entities as alternative remittance institutions6 and other finance-related entities (e.g. real estate agents, leasing companies, casinos, jewelers, portfolio management firms and money changers). In addition, outside the framework of the PBC, separate regulations are required to regulate non-bank financial institutions, such as securities firms and insurance companies. At last, as providers of financial services, gatekeepers, such as accountants, financial consultants, investment experts and lawyers have caught more and more attention in recent years, and they also should be subject to the antimoney laundering regulations. Since the laws and regulations governing financial institutions are strict, money launderers are likely to seek alternative ways to conduct laundering activities outside the formal banking system. Therefore, these serious legal gaps in the current anti-money laundering legal framework should be closed as soon as possible, if the new laws are to be effective in fighting money laundering in all its forms.
Fangmin Ruan, Comparative Research on Offence of Money Laundering, Press of China University of Peoples Public Security,
January 2002.
5
Article 395 of the Criminal Law provides that when the property or expenses of state functionaries clearly exceed their
legitimate income and if the difference is huge, they shall be ordered to explain the sources of their property. When state functionaries fail to explain the legitimacy of their property, that part of property shall be considered an illegal income.
6
Alternative remittance institutions refer to institutions that operate remittance business outside the traditional financial
institutions. It is strictly forbidden by the Chinese government to establish alternative remittance institutions.
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The Chinese government issued the amended Law on Peoples Bank of China (amended in line with the Decision Regarding the Amendment of the Law on Peoples Bank of China by the Sixth Session of the Tenth Standing Committee of the National Peoples Congress on December, 27th, 2003). Item 10 of Article 4 and item 9 of article 32 in the Law of the Peoples Bank of China stipulate that the PBC should take responsibility for anti-money laundering; however, this is not clear enough to give much effect to this responsibility. Firstly, as the national regulatory authority for anti-money laundering, the PBCs position and scope of power are not clear. The PBC has not been clearly prescribed or authorized as the national regulatory authority for antimoney laundering. Secondly, it is not clear whether non-banking financial institutions are included in the term financial industry, which should securities companies, fund companies and insurance companies. It is suggested that the definition list out all kinds of institutions, when making the law on anti-money laundering. In addition, the literal meaning of financial industry does not cover other entities, such as auction brokers, real estate companies, casinos, jewelers, investment companies and pawnbrokers. Thirdly, the responsibility for regulating anti-money laundering, as currently defined, is not comprehensive. It does not include specification of necessary responsibilities that a regulatory department of anti-money laundering should have especially the regulatory department of anti-money laundering for the banking industry. Therefore, these serious gaps in the current anti-money laundering legal framework should be mended if the new laws is to be effective in fighting money laundering in all its forms. The rules of confidentiality should be revised. This would make it clear that the reporting of large and suspicious transactions by financial institutions is exempt from the prescriptions concerning bank secrecy rules, which are stipulated in the Articles 15 and 50 of the Law on Peoples Bank of China and Articles 29, 53 and 87 of Commercial Bank Law of the Peoples Republic of China (amended by the Sixth Session of the Tenth Standing Committee of the National Peoples Congress on December, 27th, 2003). It is also necessary to make a specific new prescription (a safe harbor rule), which is to grant financial institutions and their staff immunity from criminal and civil liability for reporting large and suspicious transactions when acting in good faith (see FATF 40, Recommendation 14).
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The Supreme Peoples Court may also promulgate by its authority relevant judicial interpretation on the applicable laws for adjudicating cases of the crime of money laundering.
E. Basic structure of an anti-money laundering law A high-level Anti-money Laundering Law should not only comply with essential principles of domestic law and judicial procedure, but conform to relevant international standards and various best country practices. The basic structure of the Anti-money Laundering Law should cover the following: (1) (2) Legislative purpose and legislative foundation; Definitions (mainly include but are not limited to): a. banks; b. non-bank financial institutions; c. alternative-remittance institutions; d. other organizations; e. illicit acts (enumerating predicate offences proscribed by the Criminal Law); f. date of transaction; g. suspicious transaction; h. currency instruments; i. gains (including accrued benefits); j. property (of various forms); k. tools (of wrongdoing and crime); l. seizure, freeze and confiscation; m. controlled transfer; n. person refers to any subject endowed with rights and obligations, either natural or legal persons; o. other definitions; (3) (4) Definition, formation and scope of an act of money laundering; Anti-money laundering institutions and their functions. (anti-money laundering authorities and duties of central-level bodies, governmental department in charge and financial intelligence unit (a national center for coordinating, collecting and analyzing information on suspicious transactions) mandated by the state, relevant ministries and committees, and sectoral supervisory commissions. (5) Detailed systems to prevent the act of money laundering, which mainly include: identification and acknowledgement of customer, prudential inspection of transactions, report of suspicious transactions, safekeeping of transaction records, internal control system involving audit departments, training system and appendices (standardized forms designed to implement the above-mentioned systems, and which can be processed by computers).
(6)
Anti-money laundering functions and obligations of financial institutions. The functions and obligations of banks, non-bank financial institutions (such as securities firms, insurance companies, futures companies, funds, trust companies), alternativeremittance institutions and other relevant entities, i.e. auctioneer, leasing companies, estate institutions, entertainment-business operators, investment banks, investment companies, jewelers, shell companies (fly-by-night companies), pawn operators and charitable institutions, should be strictly defined and regulated.
(7)
Provisions for the anti-money laundering obligations of employees in the abovementioned four types of institutions;
(8)
Regulation of gatekeepers engaging in financial services (for example, accountants, finance advisors, investment experts, lawyers, securities brokers and insurance brokers);
(9)
A system for exempting banks from secrecy obligations, that is, the safe harbor rule to shield financial institutions and their staff from criminal and civil liabilities for reporting suspicious transactions;
(10) Protection of bona fide third parties; (11) Categories of criminal proceeds and illegal gains; (12) Enforcement procedures for seizure, freezing and confiscation (effective property freezing and confiscation is essential to prevent criminal proceeds from being possessed, used or transferred by the offender); (13) A system for reporting suspicious transactions (enacting a Regulation Concerning Financial Transaction Reports to concretely enumerate reporting rules); (14) Information collecting, analyzing and screening; (15) A system for money-laundering investigation (respective responsibilities of the financial intelligence unit and legal enforcement bodies for analyzing, investigating, enforcing, confiscating, for international cooperation and mutual assistance with other countries should be expressly defined); (16) Jurisdiction over acts of money laundering;
(17) Burden of proof; (18) Disposition of criminal proceeds, illegal gains 7 and properties confiscated (to stimulate even more effective cooperation, appropriate incentives for financial institutions should be considered, including certain arrangements for sharing assets detected and confiscated);8 (19) Penalty provisions: Administrative (or civil) liabilities of the offender must be identified and the offender punished; liabilities of institutions (juridical persons) for violations of anti-money laundering law should be confirmed and punished (including suspension of business, rectification and revocation of license); liabilities of legal representatives, directors, partners, officers, supervisory staff and employers in the institutions violating anti-money laundering law must be verified and the offender punished; (20) Criteria for suspects of the crime of money laundering and case reference; (21) Good-faith and integrity tests or prudential tests (this is the admission standard and preventive system for employers, especially officers, personnel in important and pivotal positions and supervisory staff); (22) International cooperation and collaboration among states (considering the
transnational character of the crime of money laundering, it is essential to enact comprehensive provisions on mutual assistance with other countries); (23) Other issues; (24) Miscellaneous.
F. Design of an anti-money laundering organization Since the design of anti-money laundering regulation by authorities in the PBC is still at a rather preliminary stage, and while the development in this direction within other financial
7 8
See Vienna Convention, Article 5.6(a), (b) and (c). See Vienna Convention, Article 5.5(b)(i).
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supervisory commissions mentioned above are also stagnant, what can be assured is that staff of all these institutions would greatly benefit from relevant training programs, which aim to acquaint them with the peculiarities of the activity of money laundering and with the quest for methods to prevent the offence. We have observed the provisions in the PRC Law of the Peoples Bank of China (as amended on December 27, 2003) on the status and duties of the PBC in fighting money laundering and an article in the Financial Times (30 September 2003) on the functions of an Anti-money Laundering Bureau within the PBC.9 This implies that the status and functions of the anti-money laundering authority and the supervision framework in China are by no means clear.
1. Establishing an Anti-Money Laundering Working Committee

The PRC should consider the establishment of an Anti-Money Laundering Working Committee at the level of Central Committee of Chinese Communist Party or the State Council to lead the work against money laundering in the nation. An Anti-Money Laundering Working Committee may be composed of following organizations and personnel: Ministry of Foreign Affairs, Ministry of Public Security, Ministry of State Security, Ministry of Supervision, Ministry of Justice, Regulatory Commission of State Property, Ministry of Land and Resources, Ministry of Construction, State Auditing Administration, Peoples Bank of China, State Administration of Foreign Exchange, General Customs Administration, CSRC, CIRC, CBRC, Supreme Peoples Procuratorate and Supreme Peoples Court.
2. Establishing an Anti-money Laundering Bureau

Establishment of an Anti-Money Laundering Bureau under the Anti-Money Laundering Working Committee, as the latters executive body. The Bureau would undertake the status and functions as the National Financial Intelligence Center as well. Being the foundation and pivot of the national anti-money laundering supervisory framework, the core responsibility of the Bureau would be to oversee the implementation of anti-money laundering laws, regulate,
The Anti-money Laundering Bureau organizes and coordinates anti-money laundering work throughout the nation: study and
draft anti-money laundering programs and policies; collect, trace and analyze the information provided by various departments on suspicious payment transactions in Renminbi and foreign currencies, refer the cases involving the offence of money laundering to judicial agencies and assist them to investigate cases suspected of money laundering offences.
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coordinate and guide national anti-money laundering work under the leadership of the State Anti-Money Laundering Working Committee.
3. Responsibilities and authorities of an Anti-Money Laundering Bureau:

a. Supervise the implementation of anti-money laundering laws; b. Enact administrative rules and departmental regulations against money laundering; c. Put forward relevant legislative recommendations and draft laws and regulations; d. Coordinate and organize national anti-money laundering work; e. Undertake the function of a national financial intelligence center; f. Lead anti-money laundering actions of various governmental organizations, supervisory commissions and other enforcement bodies; g. Be responsible for international anti-money laundering cooperation with international organizations and inter-state enforcement bodies in such aspects as sharing financial intelligence and assisting investigation; h. Act as the authority for investigation, including electronic surveillance, of suspicious transactions; i. Collect and analyze financial information and reports of suspicious transactions; j. Decide on the referral of cases suspected for the crime of money laundering; k. Deposit, manage and dispose confiscated criminal proceeds and illegal properties; l. Administer administrative punishment and civil fines; m. Construct a financial intelligence network; n. Take charge of national anti-money laundering training and general education and promotion; o. Provide anti-money laundering assistance and support for other departments and organizations.
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4. Organization of a financial intelligence unit (FIU):

Functions of the FIU. Collecting and analyzing financial data and reports from financial institutions; publishing financial information on potential criminal targets or activities (an FIU generally does not look into offences by themselves, but refers the cases to proper public security agencies for investigation): forging close relationships with other governmental departments, especially legal enforcement organizations; entering into international cooperation and mutual assistance agreements with FIUs of other countries; seeking collaboration with the Egmont Group of FIUs.
5. Professional prerequisites for the staff of an FIU:

Professional prerequisites for the staff of an FIU. The professional staff of the FIU should include accountants, legal intelligence experts, financial analysts, criminologists, legal enforcement experts, anti-fraud experts and anti-corruption experts. The Anti-Money Laundering Bureau may also recruit such non-government employers as scholars, experts, lawyers, accountants and auditors. This may be realized by setting up panel of experts and advisors or a committee of experts and advisors. Working positions of the members in the expert and advisor panel may be full-time, part-time, or both.
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FINAL REPORT, SECTION VII FINANCIAL CONGLOMERATES
VII.
FINANCIAL CONGLOMERATES
A. Introduction The emergence of increasingly complex financial groups and conglomerate structures has become a significant development in many countries in recent years. The successful management of the inter-relationships created between the separate entities involved in each of the main financial sectors of banking, securities and insurance and the effective supervision and regulation of the extended group as a whole is essential to the stable operation and continued success of any modern economy. While the traditional response in many markets has been to try to continue to impose strict separation rules between each of the main sectors (principally through controls on crossshare holdings and cross-activities), this has increasingly been perceived difficult to maintain. This is because of the break down of the underlying differences between the sectors and the continued integration of financial markets and financial services more generally. This can also been considered to reduce efficiency, competition and financial stability because of increasing inter-dependencies. The internationalization of finance also limits the efficacy of any strict separation policy by one country. A number of different levels of connection or inter-relationship can also be permitted between the main financial sectors, which do not involve strict separation or full integration but which must also be taken into account. Whether a full separation or full integration approach is to be followed, a number of difficult issues have to be resolved in designing any regulatory system that allows some form of financial grouping to be constructed. Appropriate rules must, for example, be adopted with regard to ownership and to (financial) holding company structures, to extended management suitability and autonomy requirements, to solo and group capital adequacy and capital distribution, to intra-group exposures and concentrations, to cross-sector or tied (linked) sales, to intra-group information transfers and inter-agency exchanges, to effective individual and group systems and controls and to other non-financial (commercial) linkages.
* The content of this section was prepared by George Walker, with support from Douglas Arner, Liguo Cui and Changyuan Lin.
A number of these issues have been considered by the main international financial committees including the Basel Committee on Banking Supervision, the IOSCO and the IAIS as well as the inter-group Tripartite Group of Banking, Securities and Insurance Supervisors and its successor Joint Forum on Financial Conglomerates. Despite this work, no fixed or definitive rules have been agreed both with regard to the degree of linkage that should be permitted between each sector and the manner in which the new cross-sector exposures created should be controlled. This is due to the different approaches adopted in many countries and, in particular, in the distinct polices followed in the United States and in Europe. In addition to these more specific regulatory or operational difficulties, three more general policy issues have also to be considered in connection with whether a particular country should follow a single market, a single regulator or a single regulation approach.
Each country has to determine to what extent it will allow cross-sector activities and cross-sector markets to develop or maintain a traditional separation policy. The degree of possible integration to be permitted must then be confirmed.
The issue of whether a single or multiple institutional or agency structure is to be set up should then considered. (A single-regulator approach may still operate either on the basis of separate underlying sector laws or a single financial law.)
To what extent a common or parallel set of rules and regulations are to be applied on a cross-sector basis should also be assessed (especially where some degree of crosssector activity is to be permitted).
Each of these issues has to be considered in constructing an appropriate conglomerate policy within any particular country. The purpose of this section is to consider the relevant regulatory issues that arise with regard to the emergence of financial conglomerates in the PRC and the possible supervisory and regulatory response that may be adopted. The current policy within the PRC is initially outlined. The relative advantages and disadvantages of financial conglomerate structures are noted and the current international response developed to date referred to. The more specific problems that arise with regard to ownership, regulation and supervision are also considered. The possible use of holding and financial holding company structures are, in particular, considered with
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regard to ownership regulation as this will be of particular importance in the PRC. The separate issues that arise in connection with management, capital adequacy, internal systems, intra-group exposures, concentrations and cross-sales are referred to and the need to supervise groups on a consolidated, business unit and conglomerate basis noted. Reference is also made to the possible options available for developing effective inter-agency contact and co-operation (including through the use of MOUs, administrative laws or regulations and the possible creation of a single regulator). Summary recommendations are made below with regard to reforms in this area within the PRC.
B. Summary Conclusions and Recommendations The main conclusions and recommendations made on the reform of the laws in the PRC with regard to financial conglomerates can be summarized as follows: General Policy (1) An appropriate policy must be constructed with regard to financial groups that properly balances regulatory safety and stability with financial flexibility and innovation. (2) The PRC should continue with its existing sector and separate-agency-based system at
this time which will reinforce separate sector supervision and assist avoid any significant risk of cross-sector loss transfer at this stage in its transition from a managed to a market economy. This should be supported by the creation of an appropriate co-ordination mechanism among the three separate sector regulators and between these agencies and the PBC. (3) A series of related reforms must nevertheless be considered to allow this to operate in an
effective and efficient manner, which would, in particular, include the adoption of a separate Law on Financial Groups as well as revision to the existing financial laws to the extent necessary. Financial Groups (4) The PRC should adopt an intermediate financial holding company model requiring
notification (registration), consent and regular reporting. This would combine the benefits of direct approval and oversight but without the additional costs and burdens involved with setting
up a full supporting regulatory regime for holding companies. This would also be easier and cheaper to set up initially and can be reviewed and revised over time. (5) The PRC should initially adopt a pure financial holding company rather than an
operating holding company system although this may be considered further over time. (6) Existing restrictions on commercial ownership and commercial activities should continue
except that group parent companies should be entitled to hold the shares in financial holding companies with financial and commercial operations then held in separate arms within a group. Cross-Sector Supervision (7) The PBC should be made responsible for the supervision of complex financial groups
through a new Financial Groups Division, which would operate within a larger new Financial Stability Department. (8) A separate Joint Financial Stability Committee should also be set up consisting of
representatives from the PBC as well as the CBRC, the CSRC, the CIRC and the MoF. This would be served, for administrative purposes, by the personnel within the Financial Groups Division in the PBC. (9) The Joint Committee would oversee the development of more complex financial groups
within the PRC including taking all major decisions with regard to approval, reporting and enforcement or closure. Supervisory and Regulatory Revision (10) (11) Consolidated supervision must apply within the banking, securities and insurance sectors. Information should be collected through the existing sector agencies. More general group
information should be passed on to the Financial Groups Division in the PBC, with investigations and inspections also being conducted at the sector level (with some reserve power being conferred on the PBC in the extent that the other agencies fail to act without cause). (12) A number of regulatory adjustments must be made to the existing financial laws,
including those with regard to such matters as firm and group suitability, systems and controls, capital adequacy (on either a building block prudential, risk based aggregation or risk based
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deduction method), intra-group exposures and concentrations, conflicts of interest, client information (including the production of clear privacy polices) and crisis management. Joint Committee (13) The Joint Committee should be set up by law and chaired by a State Commissioner or
Deputy Prime Minister. (14) Inter-agency relations between the PBC, CBRC, CSRC and CIRC would be co-ordinated
through the Law on Financial Groups, although a supplementary memorandum of understanding (MOU) may also be entered into. (15) Appropriate relations would be established with other overseas authorities through the
use of separate MOUs. Financial Stability Department (16) The new Financial Stability Department would have separate divisions on Financial
Stability, Financial Groups, Financial Markets, Financial Restructuring and Financial Recovery with all major decisions in each area being referred to the Joint Committee for approval. Further Financial Reform (17) The PRC must continue to monitor developments within the structure and operation of
financial markets and track best supervisory and regulatory practice on a national and global basis. (18) The PRC may consider setting up a single regulator as the China Financial Regulatory
Commission (CFRC) at some point in the future. This could be achieved without abolishing the underlying separate sector, separate supervision policy through the creation of separate Departments for each major sector. (19) The PRC may consider adopting a single integrated law to govern the supervision and
control of all financial markets and services in due course (such as a Law on Financial Regulation or Law on Financial Markets and Services).
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The PRC could also create of a fully integrated regulatory regime at some stage, on the basis of a single legislative framework with supporting authorization, supervision and enforcement system. (20) These further reforms should nevertheless only be considered in the event that financial
market evolution and the development of regulatory experience and practice permit. The governing objective must be to ensure that the PRC is able to protect the safe and stable operation of its financial markets and financial system at the same time as promote innovation and growth within an expanding economy.
C. PRC Law and Practice The current Laws in the PRC are sector based. Relevant legislation includes the Commercial Banking Law, the Securities Law and the Insurance Law. Each of these laws generally prohibits cross-sector operations and ownership structures. Despite the adoption of a more traditional separation doctrine, some large complex groups have already begun to emerge in the PRC either directly or through the use of financial holding companies based in Hong Kong, SAR, China or elsewhere. 1 The largest financial group on mainland the PRC is China International Trust and Investment Corporation (CITIC) which was established on 5 December 2002. Other stateowned conglomerate models include China Everbright Group and China Merchants Group as well as the four state-owned commercial banks that continue to dominate the banking industry in China, the BOC, the CCB, the ICBC and the ABC, all of which operate significant non-bank financial businesses through off-shore subsidiaries that, nonetheless, practice on shore. Other SOEs and private sector corporations are also anxious to develop their own financial operations (including Haier Group and the Delong Group in Xinjiang Province). The entry of foreign owned financial groups and conglomerates must also be taken into consideration in addition to the continued expansion of these large domestic operators.
See 'Financial holding companies are vividly portrayed', China Securities (29 August 2002). For general
discussion, see Changyuan Lin, 'Financial Conglomerates in China' (University of London, unpublished paper under supervision of G. A. Walker', 26 February 2003). INTERNATIONAL LAW INSTITUTE 165 15 DECEMBER 2003
Within the PRC, financial markets are controlled through three separate regulatory agencies, the CBRC, the CSRC and the CIRC. Each of these also maintains a number of provincial and city offices. The PBC also retains more general responsibility for the monetary policy and stability of the financial system although its specific function with regard to continued market oversight and supervision is unclear in advance of the revision of the PBC Law that is currently being considered. A multiple sector-based, rather than single-agency, structure has accordingly been adopted in the PRC in combination with a traditional strict separation model for financial regulation.2 This is supported by the retention of separate laws in each of the three key sector areas of banking, securities and insurance. A sector-based agency and regulatory approach has then been chosen (generally referred to as separate market, separate supervision). The PRC authorities are nevertheless aware of the potential benefits of allowing financial groups to develop on a cross-sector basis. The first conglomerate within the PRC, CITIC Holdings, has since been approved by the State Council with three more groups having applied for authorization. While the anticipated policy will remain separate-agency and sector-law based, some relaxation of the demarcation that exists between the main sectors is being considered and the consequent necessary regulatory amendments being examined. All of these developments will create significant challenges for the regulation of financial markets and maintenance of financial stability within the PRC. The main issues that arise with regard to the possible benefits (advantages) and exposures (disadvantages) that may arise from a more open market policy are considered in the following sections, along with the possible regulatory responses that may be adopted.
D. Conglomerate Advantages and Disadvantages A number of relative advantages and disadvantages arise with regard to financial conglomerates.
For discussion of the various models used in respect to financial regulation and their interaction with
conglomerate law and financial structure, see D Arner and J Lin, Financial Regulation: A Guide to Structural Reform (Thomson Sweet & Maxwell, 2003). INTERNATIONAL LAW INSTITUTE 166 15 DECEMBER 2003
Possible advantages include economies of scope and scale, which can generate lower costs, reduce prices and improve product and service innovation. 3 Sector linkages and synergies can also improve general competitiveness while overall stability is increased through diversified revenue streams. Product variety and innovation can increase customer loyalty and market penetration and development. New corporate structures also allow maximum commercial advantage to be gained while complying with relevant statutory permissions and restrictions.4 While some writers refer to this as a separate advantage, this may also be considered to constitute a form of regulatory avoidance, which may or may not be considered desirable, depending upon the purpose and content of the underlying restrictions imposed. Against these advantages, difficulties may arise with regard to double-gearing of capital, risk management capacity, intra-group exposures, conflicts of interest and lack of sufficient management authority and autonomy. Supervisory problems may also arise in terms of transparency and the identification of the proper center of management and control. The most significant additional risk that arises is the possibility of loss transfer, or transfer pricing, between entities within the group and consequently between the separate financial sectors involved. Significant losses suffered in a more volatile area of group activity such as in a derivatives, currency or securities subsidiary may then be transferred to the insurance or banking parts of the same group. Even in the absence of actual legal or financial liability, this contagion can spread through reputational damage alone. This danger of potential cross-sector loss transfer is possibly the most significant difficulty that arises with regard to conglomerate business structures.
See G A Walker, International Banking Regulation - Law, Policy and Practice (Kluwer Law, 2001),
Chapter 3, Section 2.
4
The inclusion of sector and financial holding companies within a conglomerate structure can be used to
avoid some of the commercial or economic restrictions that may otherwise apply. Other advantages may then arise in raising capital, share or stock liquidity and taxation depending upon local conditions. Benefit may also arise in terms of product or service innovation where restrictions that may otherwise apply to individual financial institutions can be bypassed. This may, for example, include geographic restrictions (such as inter-state banking in the US) or
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The traditional method for dealing with such possible loss transfer is to impose restrictions on the main types of activities that financial institutions may conduct. Separation rules or structural regulation can then be used to distinguish the main financial sectors such as under the original US Glass-Steagall model.5 Institutions in one sector are then prohibited from conducting activities in another. The alternative to a system of strict separation is to impose additional regulatory requirements and, in particular, capital controls on institutions that are active in more than one of the main financial areas. This is the policy adopted in Continental Europe where the large universal banks are authorized to conduct banking and securities as well as other ancillary financial activities from within the same corporate or legal form. Additional capital requirements are then imposed on each of the distinct financial risks identified including, in particular, credit risk (in the banking or loan book), market risk (in the securities or trading book) as well as interest-rate, currency and other risks (including financial derivatives and commodity-related risks) and operational risks. This alternative model then operates through subsequent loss absorption rather than initial loss prevention under a separation option. While strict sector separation would appear to prevent loss transfer, the increasingly complex and inter-connected nature of modern financial markets will often not permit such strict demarcation to be maintained. Financial crisis within one sector may more easily spread into other sectors with alternative regulatory and financial stability responses being required. Even where a strict sector-separation policy is adopted within a conglomerate (including through the use of holding-company requirements and supporting 'firewalls'), contagion may still spread through reputational damage and exposure alone with the expectation that a parent or related group company will inevitably support its corporate affiliate. This risk of cross-sector contagion may be further aggravated where gaps or omissions within the regulatory framework (due to underlying design faults) allow certain group activities
controls on the types of financial activities that may be carried out (such as under the Glass-Steagall provisions of the US Banking Act 1933 that separated commercial and investment banking). See Section D below.
5
This policy was also followed in Japan following the Second World War although substantially relaxed
subsequently. INTERNATIONAL LAW INSTITUTE 168 15 DECEMBER 2003
to be unsupervised or unregulated.6 Losses arising in such areas may then undermine the stability of the whole financial group, which will, in turn, result in losses from one sector being transferred to another with the consequent contagious damage that that could cause. The more general recent tendency in developed markets has been to allow financial groups to realize some if not many of the benefits of conglomerate business structures rather than maintain traditional full strict separation rules. Various restrictions and controls must nevertheless be imposed through a range of ownership, regulatory and supervisory requirements to ensure that a safe balance is maintained. The degree of residual control effected will then depend upon the size and structure of the economy and its relative stage of development. No fixed rules can be set with the degree and nature of the controls imposed being dependent upon the amount of cross-sector holding and cross-sector activity permitted. It has nevertheless to be expected that more strict ownership and other control requirements will generally be imposed in transitional and emerging economies although these may still be further relaxed over time as markets and regulatory familiarity and experience and expertise develop.
E. International Regulatory Response International authorities became concerned with the emerging problems that arise with conglomerates during the late 1980s and early 1990s. These problems were initially highlighted by the Basel Committee in a number of its biennial reports during the late 1980s. The Committee then issued certain principles concerning the supervision of financial conglomerates in September 1992. 7 The Report identified a number of specific difficulties that arose with
This arises from financial and regulatory mismatch which result form underlying financial structure and
regulatory design flaws. A particular countrys financial regulatory structure may not correspond closely with the structure of its financial sector with significant regulatory gaps arising. Larger unsupervised groups may, in particular, develop within a strict separation l system in which firms are regulated on a sector and not a group basis. This may then generate significant risks at the group level that are not otherwise managed or controlled. It is partly in response to this that various forms of consolidated or group supervision have been developed although this may still not be sufficient where the sector regulator has inadequate powers to deal with the exposures created.
7
See Basel Committee, Principles for the Supervision of Financial Conglomerates (September 1992). 169 15 DECEMBER 2003
conglomerates and attempted to establish certain general principles of supervision for financial conglomerates. IOSCO issued a separate Report at its 17th Annual Conference in London in October 1992.8 In its Report, IOSCO also attempted to establish certain general principles for the risk assessment of conglomerates that could be used, insofar as possible, to direct the development of regulatory practice and co-operation in the area. Eight general principles are identified in a substantially shorter paper than the September 1992 Basel paper. A separate Tripartite Group of Supervisors was then established at the suggestion of the Basel Committee consisting of representatives from the Basel Committee, IOSCO and the IAIS. The Tripartite Group was set up in February 1993 and issued a progress report in April 1994, which was followed by a final Report in July 1995.9 The 1994 Progress Report contained certain general recommendations with regard to supervisory approaches, co-operation, capital adequacy, structure, ownership and management, contagion, external auditors and supervisory arbitrage. In its full July 1995 Report, the Tripartite Group provided a much more substantial examination of the structure and operation of financial conglomerates and the supervisory issues that arose. The Tripartite Group defined a conglomerate as any group of companies under common control whose exclusive or predominant activities consisted of providing services in, at least, two different financial sectors (banking, securities and insurance). Various supervisory issues are identified including capital, contagion, intra-group exposures, large exposures, conflicts of interest, suitability, transparency, management autonomy, shareholders, access to information, supervisory arbitrage, moral hazard and mixed conglomerates. A number of provisional recommendations are included within the final report. In light of the perceived continuing importance of the need to supervise conglomerates effectively, the earlier Tripartite Group was replaced by a more formal Joint Forum on Financial Conglomerates at the beginning of 1996.10 A Progress Report was produced by the new Joint
8 9
See IOSCO, Principles for the Supervision of Financial Conglomerates (November 1992). See Tripartite Group, Progress Report on the Supervision of Financial Conglomerates (April 1994); and
Tripartite Group, Report on the Supervision of Financial Conglomerates (July 1995).

10
The Joint Forum is made up of 25 persons representing the banking, securities and insurance sectors. 170 15 DECEMBER 2003
Forum in April 1997, which was followed by a series of consultation documents in February 1998, consisting of a series of separate papers on capital adequacy, fit and proper principles, information sharing and supervision. Two further papers were released in July 1999 on intragroup transactions and exposures (ITEs) and risk concentrations (RCs). A series of revised final documents were then issued in December 1999. These documents and, in particular, the series of supervisory papers issued by the Joint Forum contain a number of important recommendations for the supervision of financial conglomerates. These are generally based on a series of principles in each of the key areas of suitability (fit and proper), information sharing, co-ordination and intra-group exposures and concentrations. In connection with capital adequacy, three specific techniques are identified for use in assessing group-wide capital (including a 'building-block prudential approach', a 'riskbased aggregation method' and a 'risk-based deduction method'. These are designed to allow for a total group capital figure to be calculated but are to otherwise concerned with revising the existing separate capital rules that apply to banks, securities firms and insurance companies. The operation of each is also necessarily dependent upon local accounting and reporting requirements. The international papers issued to date do not deal with the more general problems of sector separation and the use of holding company and financial holding company models as well as the more significant problem of loss transfer and extended market (lender of last resort) support. Each of these issues must also be taken into account in designing any effective national response.
F. Bank Holding and Financial Holding Company Rules In areas where a non-separation policy is adopted, such as Continental Europe, universal banks are entitled to carry on a range of activities including core deposit taking and securities trading and underwriting. 11 If sector separation is to be maintained, the two main types of controls are business or activity restrictions (through authorization or licensing) and ownership
11
See, for example, Annex to the Second Banking Directive; as restated in the Banking Consolidated
Directive. See Directive 2000/12/EEC of May 2000 relating to the taking up and pursuit of the business of credit institutions. INTERNATIONAL LAW INSTITUTE 171 15 DECEMBER 2003
controls. The most common device is to define narrowly the permitted activities that a financial institution may undertake. This is often referred to as the 'general prohibition' in each of the mina financial laws. Institutions may be permitted to carry on certain ancillary activities although these will not involve any other core service in a separate sector.12 Where activity or authorization restrictions are imposed, these are usually supported by ownership rules to prevent avoidance through holding and subsidiary company relationships. Bank holding company controls were initially developed in the US, with the original intent of restricting the geographic expansion of branch networks. The development of substantial banking groups was then further restricted with the Bank Holding Company Act in 1956 (BHCA). The objective was accordingly to restrict the territorial, financial and non-financial expansion of bank groups.13 Whether the imposition of similar controls on regional or provincial banking in the PRC is appropriate would have to be considered separately although this in highly unlikely. More significant advantage may be obtained from trying to strengthen the existing financial groups to allow them to deal with their current problems including NPLs. Any anticompetitive effects of group growth and expansion would be dealt with separately under a competition or cartel law in the PRC. The earlier restrictions imposed under the BHCA in the US were subsequently relaxed after an extended period of lobbying, which led to the adoption of the Financial Competitiveness (Gramm-Leach-Bliley) Act in 1999. This followed some earlier relaxation of the bank holding company restrictions during the 1990s. Gramm-Leach-Bliley then provided for the establishment of 'financial holding companies' which may own subsidiary operations in each of the major financial areas. Financial holding companies may conduct the same activities as bank holding
12
US law generally uses such terms as 'closely related to banking as to be a proper incident thereto' 12 USC
SS 1843 (C)(8). Financial holding companies may also undertake any other activity that is 'financial in nature or incidental to such financial activity' or 'complementary to a financial activity' (provided that it does not 'pose a substantial risk to the safety or soundness of depository institutions or the financial system generally'). GrammLeach-Bliley Act, Pub. L. No. 106-102, ss 103(a) (adding a new 12 U.S.C. SS 1843 (K)(a)), 113 Stat. 1338, 1342-50 (1999).
13
Despite these restrictions, bank holding companies controlled 96% of all bank assets by 1998 with only
one-fifth of US banks operating without a holding company with most of these being small state banks. See McCoy, para 4.01. INTERNATIONAL LAW INSTITUTE 172 15 DECEMBER 2003
companies as well as any other activity that is 'financial in nature' provided that these activities do 'not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally'. Financial holding companies must be well capitalized and well managed with their subsidiary banks and thrifts having a satisfactory or outstanding Community Reinvestment Act rating. Although originally established to restrict geographic expansion and consolidation, the use of bank holding companies in increasing financial stability has also been recognized subsequently.14 In the 1980s, the Federal Reserve's 'source of strength doctrine' required bank holding companies to support the solvency of their bank and thrift subsidiaries where necessary including through capital injections. This is clearly contrary to traditional doctrines of the limited liability of corporate entities, although it does reflect the close nature of the relations that exist between group companies and the need to protect the instability of the banking markets. One of the other major difficulties that arose in negotiating the US Gramm-Leach-Bliley Act was in connection with the exchange of non-public customer information and crossmarketing. This caused significant difficulty as the major banking groups wanted to retain the right to make full use of this sort of valuable information. The compromise agreed was to allow information exchange within the holding company subject to customers opting out of sales of their personal information to unaffiliated third parties. This is also subject to exceptions including where it is considered necessary to carry out the institution's functions. A number of restrictions are imposed on the development of financial rules in the PRC although no clear and consistent policy has yet been adopted. The PRC could consider setting up a full bank holding company and financial holding company system on a US model which may create certain advantages such as by strengthening the stability of groups through the imposition of support obligations on holding companies and other group companies for affiliates in difficulty. These are nevertheless onerous and complex provisions, which would, in particular, require the creation of a separate regulatory regime for bank holding and financial holding
14
The US Supreme Court described the objectives of the BHCA as being: (a) to restrict the control of
banking and non-banking enterprises by a single business entity; (b) to prevent anti-competitive tendencies in national credit markets through restrictions on concentration; and (c) to ensure the safety and soundness of banks and the safety and soundness of their bank holding companies (see First Lincolnwood, 439 U.S. at 243, 248). INTERNATIONAL LAW INSTITUTE 173 15 DECEMBER 2003
companies in addition to the underlying banks, securities and insurance firms regimes already in place. The alternative would be to require consent for the establishment of new financial holding companies. Restrictions could also imposed on holding companys activities with certain ongoing reporting obligations. Further controls could be imposed on group structures such as requirements that any other commercial operation within a group be conducted through a separate arm distinct from the financial entities.
G. Regulatory and Supervisory Revision The main regulatory issues that arise include such matters as intra-group exposures, capital allocation, management autonomy, internal systems and controls and crisis management. It is also essential to ensure that financial groups are supervised on a consolidated basis. While consolidated supervision has become an essential element of almost all modern regulatory systems, many have also extended this to include significant business or management unit supervision and financial conglomerates more generally. The objective of each of these initiatives is to ensure that conglomerates are subject to effective regulation and supervision as they are allowed to develop.
1. Regulatory Revision
Certain adjustments have to be made to sector-based legislative frameworks to ensure that they continue to be relevant for conglomerates. The main areas involved have already been referred to. The following particular issues may be referred to: (a) Intra-group Exposures A range of exposures may arise between subsidiary and parent companies within a conglomerate structure. These include direct draw-down facilities, loans and cross-guarantees. Other indirect exposures may also arise, for example, with regard to negative pledges and cross default clauses in general loan documentation, which may be triggered by an affiliate's default. The Basel Committee referred to the contagion difficulties that were significantly exacerbated through complex intra-group exposures created as a result of direct and indirect claims including
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credit lines, equity investments, trading exposures, liquidity management, guarantees and commodities. The further problems that can arise with regard to the exclusion of intra-group exposures from a consolidated balance sheet as a result of netting arrangements and the non-arm's length nature of the transaction were also referred to by the Tripartite Group. While the Joint Forum accepted that intra-group transactions can facilitate synergies within different parts of a conglomerate which generate cost efficiencies and profit maximization, hidden exposures may still be created. The Joint Forum accordingly stated in its July 1999 paper that intra-group risks were generally poorly understood with groups only considering these to the extent expressly required by relevant authorities. Few groups had developed appropriate internal approaches to managing and monitoring such risks. (b) Capital Calculation and Distribution Separate difficulties arise with regard to the calculation of total group capital within a conglomerate and with ensuring that this is properly distributed across the companies concerned. One of the major problems that arises with group structures is with the 'double-gearing' of capital. This occurs whenever intra-group investments are included within available group capital.15 As the same capital is effectively transferred from the asset to the liability side of the balance sheet each time, there is no increase in the original capital invested although the total group figure will be considerably higher. Best practice is accordingly to deduct intra-group holdings and investments in unregulated non-financial entities. Various techniques have been developed to attempt to calculate total capital within heterogeneous groups. Four particular systems have been identified although only three have been approved at this stage.16
15 16
Long chains of vertical investment may arise which produce a large total capital figure. The fourth technique is referred to as 'block capital adequacy' which involves the classification and
aggregation of assets and liabilities according to risk types. This can achieve an accounting based consolidation within heterogeneous groups although this will require the development of harmonized standards which may be impracticable for some time. See Tripartite Group, July 1995 Report, paras 109-110. See also Joint Forum, Capital Adequacy (February 1999). INTERNATIONAL LAW INSTITUTE 175 15 DECEMBER 2003
(i)
the 'building block prudential approach' involves using the consolidated accounts at the parent company level;
(ii)
the 'risk-based aggregation' approach totals the solo capital requirements of the regulated group and compares the result with group capital; and
(iii)
the 'risk-based deduction' method looks at each company in turn, beginning at the lowest group level, with subsidiary investments being subject to a risk deduction calculated on the basis of the own-funds of the subsidiary assessed on a solo-plus basis less the capital requirement of the subsidiary multiplied by the proportion of shares held in the subsidiary.
Rather than impose any specific model, the Joint Forum confirmed that groups should adopt any of these three methodologies. The selection will depend on the type and structure of the conglomerate involved. Capital would also still have to be properly distributed within the group to ensure that each operating entity was adequately capitalized in accordance with the relevant regulatory provisions. (c) Management Authority and Autonomy It is essential that management within each regulated entity is suitable and has sufficient authority to conduct their functions. Conglomerate management will necessarily involve some degree of centralization although it is also essential that proper and effective oversight is maintained at the regulated entity level. Supervisors and regulators must ensure that regulated and non-regulated holding companies have adequate strength of management to ensure that total group risk is prudently managed. A series of 'fit and proper' principles designed to ensure proper management suitability were developed by the Joint Forum in its February 1988 paper. These are generally based on suitability, review and consultation. Sufficient management autonomy must also be conferred on each regulated entity to ensure that it complies with relevant regulatory obligations. This is, in particular, necessary to avoid any conflicts of interest arising at the regulated entity level. Supervisors should know who is responsible for compliance with legal and supervisory requirements and be informed of any significant changes in shareholders as well as significant management changes within the group.
(d) Systems and Controls and Conflict of Interest Adequate systems and controls must be maintained at the regulated entity and group level. Unfortunately, little guidance has been provided in this regard at the international level. The adequacy of any specific financial firm's systems and controls will have to be assessed at the national level both on initial authorization and on a continuing basis thereafter. Serious conflicts of interest may arise where different parts of the group act for the same customers or investors. This may be partly dealt with through 'Chinese walls' although their operation would have to be subject to strict conditions at the national level and subject to effective continuing oversight. Difficulties may also arise where banking or insurance entities within the conglomerate make loans or invest assets within the group outside usual approval processes or where investors with substantial holdings have separate contractual relationships within the group creating both shareholder and credit conflicts. No detailed recommendations have been issued in this regard although these will generally be dealt with through management and shareholder suitability, management authority and autonomy and effective internal control systems. This remains a significant problem, which must be considered within any particular national regulatory systems. (e) Crisis Management Effective crisis management systems must be maintained within regulated firms to ensure that any difficulties that arise are properly identified and corrected. This will generally be carried out as part of the ongoing risk management functions of the entity although additional exposures may arise through direct and indirect intra-group relations. Effective crisis management systems must be maintained at both the regulated entity and conglomerate levels. Unfortunately again, little guidance has been provided in this regard at the international level with national authorities having to consider the relevant issues from a local domestic perspective.
2. Supervisory Adjustment
It is essential to ensure that all complex groups are subject to effective supervision. This, in particular, requires that adequate information is obtained with regard to regulated entity and
group activities and that this information is capable of necessary exchange and proper distribution. These issues were considered by the Joint Forum in its framework and information sharing papers. The Joint Forum produced a number of principles for information sharing generally based on sufficiency, co-operation, full communication, distribution and necessary contact and trust. While such general principles are of value, individual entities and groups must be effectively supervised on a continuing basis in practice. For this purpose, most countries have developed relatively complex consolidated supervision systems to ensure that regulated firms are properly supervised on a solo and a group basis. Certain countries have since extended this to include significant management or business units with additional information also being obtained in connection with more complex conglomerate structures. (a) Consolidated Supervision Consolidated supervision was originally adopted at the international level by the Basel Committee in 1979 and then within the EU under the first Consolidated Supervision Directive in 1983. It was subsequently extended to include securities subsidiaries and holding companies in 1992. 17 These requirements have since been restated within the 2000 Banking Supervision Directive. This is based on the definition of a 'credit institution' (bank) and 'financial institution' (non-bank financial entity) as well as a 'financial holding company'. The EU provisions also include within the scope of consolidation 'ancillary banking services undertakings' with information requirements also being imposed on 'mixed-activity holding companies' and insurance companies.18 Mixed-activity holding companies are required to provide information on group activities which information may be verified under the inspection procedures provided for. (b) Business Unit Supervision
17
See Council Directive 83/350/EEC of 13 June 1983 on the supervision of credit institutions on a
consolidated basis; and Council Directive 92/30/EEC on the supervision of credit institutions on a consolidated basis.
18
A 'mixed-activity holding company' is a parent undertaking, other than a financial holding company or a
credit institution, the subsidiaries of which included, at least, one credit institution. BCD, article 1.22. INTERNATIONAL LAW INSTITUTE 178 15 DECEMBER 2003
Certain countries such as the UK have since extended supervision to include other significant business as well as legal subsidiaries within the scope of consolidation. The limitation of consolidated supervision is that it only applies to separate legally incorporated entities. More complex financial groups are rarely organized on a legal entity basis in practice but rather on geographical or product lines. The effect of consolidation is then to bring these separate corporate entities within the scope of supervision although not the underlying business and management units involved. Under the UK rules, a 'significant management unit' is one that carries on any separately identifiable revenue generating activity with a group.19 This management unit requirement was developed as part of a larger revision of the nature of modern bank supervision in the UK, following the collapse of Barings in 1995.The Bank of Englands objective was to develop a new 'supervision by risk' approach based on the identification of a bank's specific risks (CAMEL B) as against its control capability COM (Internal Controls, Organisation and Management). CAMEL consists of a bank's capital, assets, market risk and earnings as well as a general business factor (B), which constituted a revised form of the US CAMEL (Capital, Asset, Management, Earnings and Liquidity). This RATE framework has since been revised and developed within the FSA's larger new regulatory approach and operating framework adopted since the coming into effect of the Financial Services and Markets Act in December 2001. It is not necessary that the PRC consider adopting such an approach, at least, initially and with regard to all financial institutions. This should nevertheless be considered with some management unit requirements possibly being applied with regard to more complex groups over time.
19
The original Quantitative Consolidated Supervision Guideline produced by the Bank of England (before
assumption of the responsibility for the supervision of banks by the FSA) defined a significant management unit as one that satisfied one of four quantitative criteria or was otherwise considered by the authorities or by the management of the reporting institution to give rise to any significant business or control risk. The quantitative criteria were that the unit generated 5% or more of revenue, 5% or more of pre-tax profit or loss of the consolidated pre-tax profits, 5% or more of the consolidated capital requirement or if the group's investment in the unit is deducted and the investment represents 5% or more of the consolidated capital base before deduction. See Bank of England, RATE Framework (1997), Annex I. INTERNATIONAL LAW INSTITUTE 179 15 DECEMBER 2003
(c) Conglomerate Supervision Few countries have any sophisticated form of conglomerate supervision directly. The EU Banking Consolidation Directive extends consolidated supervision generally to include banks and securities firms with additional information requirements being imposed on insurance related and other mixed-activity groups. No specific guidance is, however, provided as to how the supervision is to be conducted. Only general information collection principles have been developed at the international level with no specific direction being provided in connection with conglomerate supervision. A general obligation of 'supplementary supervision' is imposed on 'financial conglomerates' although this only applies to the matters listed including financial position, coordinated appointment and co-operation and exchange of information. The UK has attempted to develop a new regulatory approach that applies to all financial institutions on a common and integrated basis. This was considered necessary following the coming into effect of the Financial Services and Markets Act and the creation of a single regulatory framework under the authority of the FSA. This is based on the identification of a number of probability and impact factors designed to allow the FSA to assess the extent to which it has complied with its regulatory objectives as set out in the Financial Services and Markets Act. The effect of this new 'supervision by risk' system is to develop a new model approach that could apply to all financial risk on an integrated basis, including credit risk, market risk, insurance risk, group risk and liquidity risk. This may then be suitable for use in connection with financial conglomerates in particular. It is not expected that the FSAs new sourcebook on this will come into effect until 2004, with some sections having been postponed until 2006 to parallel the proposed capital amendments under Basel Committees proposed New Capital Accord (Basel II). The effect of this new 'supervision by risk' system is to develop a new model approach that could apply to all financial risk on an integrated basis, including credit risk, market risk, insurance risk, group risk and liquidity risk. This may then be suitable for use in connection with financial conglomerates in particular. It is not expected that the FSAs new sourcebook on this will come into effect until 2004, with some sections having been postponed until 2006 to parallel the proposed capital amendments under Basel Committees proposed New Capital Accord (Basel II).
The adoption of a 'risk by risk' approach would be considered inappropriate in the PRC at this stage especially as it has not adopted a single legislative framework but rather continues supervision and regulation on a sector basis. The construction of such a cross-risk approach may nevertheless be examined further over time as markets and financial groups develop.
H. Conglomerate Laws Few distinct or full 'conglomerate laws' have been adopted to date. Many countries have created a 'single regulator' although these systems have often only continued to apply the separate sector laws that previously applied.20 A smaller number of countries have adopted a further 'single regulatory' approach that attempts to create a single legislative framework for all services and markets. The most developed example of this is the UK. Where a single legislative framework has not been established, most conglomerate measures operate through regulatory or supervisory adjustment within the existing sector laws. The effect of this is to incorporate revisions or adjustments into existing regulatory and supervisory provisions to ensure that they are capable of proper and effective application in a conglomerate situation. One of the most important attempts to construct a single set of coherent provisions that draws all of these amendments and revisions together within an integrated approach is that set out in the proposed EU draft Directive on Financial Conglomerates. The objective of the proposed EU law is to lay down rules for the supplementary supervision of regulated entities within a financial conglomerate.
20
Countries with single supervisors for all financial intermediaries include: (1) Denmark; (2) Estonia; (3)
Germany; (4) Hungary; (5) Ireland; (6) Japan; (7) South Korea; (8) Latvia; (9) Malta; (10) Norway; (11) Singapore; (12) Sweden; and (13) the United Kingdom. Countries that have single supervisors for banks and insurers or banks and securities firms include: (14) Australia; (15) Austria; (16) Canada; (17) Columbia; (18) El Salvador; (19) Finland; (20) Iceland; (21) Jamaica; (22) Luxembourg; (23) Malaysia; (24) Mauritius; (25) Mexico; (26) Pakistan; (27) Paraguay; (28) Peru; and (29) Venezuela. Other countries considering adopting an integrated supervisory framework include: (30) Bulgaria; (31) Kazakstan; (32) Poland; (33) Slovakia; (34) Slovenia; (35) South Africa; (36) the Ukraine; and (37) Indonesia. See de Luna-Martinez and Rose, in D Arner and Lin, n. 10. INTERNATIONAL LAW INSTITUTE 181 15 DECEMBER 2003
The proposed EU Directive includes a series of new and revised definitions including 'financial conglomerate' and 'mixed financial holding company' (article 2).21 Separate threshold conditions are imposed on the definition of a financial conglomerate (article 3) and an identification obligation (article 4). The Directive contains further provision with regard to supplementary supervision (Chapter II) including financial position, appointment of a coordinator, co-operation and exchange of information, third country reciprocity, creation of a 'Financial Conglomerate Committee' (Chapter III) and a series of amendment provisions (Chapter IV). Separate provision is included with regard to asset management companies (Chapter V) and certain transitional and final provisions (Chapter VI). The EU draft Directive on Financial Conglomerates is an important initiative in developing a necessary framework for the supplementary supervision of financial conglomerates. This is particularly relevant where existing sectoral supervisory and regulatory systems are to be maintained. Supplementary supervision is then developed as an adjunct, complementary or supporting mechanism to existing sector based supervision. This also has the advantage of giving effect to all of the main elements of the Joint Forum recommendations including, in particular, capital, intra-group exposures, concentrations, suitability and information exchange. The draft EU Directive contains some provisions that would be of value in the PRC. Little assistance is, however, provided with regard to detailed regulatory content as the Directive is concerned with establishing the more general principles that should apply. A number of other matters are also dealt with in other existing Directives such as consolidated supervision and information exchange. The Directive is accordingly of value but it must be considered with other supporting European measures that would apply.
I. Institutional Relations Appropriate inter-agency relations have to be established where more than one authority is responsible for the supervision and regulation of financial markets in any particular country.
21
A parent undertaking, other than a regulated entity, that together with its subsidiaries, at least one of which
is a regulated entity which has its head office in the EU and other entities, constitutes a financial conglomerate. FCD, article 1.15. INTERNATIONAL LAW INSTITUTE 182 15 DECEMBER 2003
Appropriate arrangements governing these relations may either be set out in an administrative law or regulation of some form or under a memorandum of understanding entered into between the relevant agencies. Agreed inter-agency relations are necessary wherever a financial institution may undertake some cross-sector activity or cross-sector holdings or ownership is otherwise permitted. The residual issue in such cases would then only be market support (lender of last resort) although even this would be restricted to the banking markets and managed through the central bank. If some cross-sector activity or holdings is to be permitted in the PRC, appropriate interagency relations would have to be established either in the form of a memorandum of understanding or administrative law or regulation. The longer-term option that may be considered would be to merge the existing sector agencies and establishing a single financial regulator.
1. Memorandum of Understanding
Various mechanisms may be developed to facilitate co-operation between supervisory authorities. These include establishing a 'college mechanism' such as that used in the case of BCCI or the appointment of a 'lead regulator' or 'co-ordinator'. This may be supported by further separate committee arrangements at the regional or international level such as through the Contract Group (Groupe de Contact) within the EU, which considers issues of common interest with regard to the supervision of particular banks or banking groups. These mechanisms are generally designed to support the collective supervision of individual financial institutions or groups. Specific problems will be discussed and general policy or co-ordinated action agreed. Although an advantage in terms of negotiation, this informality creates consequent problems in terms of enforcement with the validity and effect of such arrangements generally being dependent upon sufficient goodwill and commitment between the authorities concerned. No formal enforcement mechanisms can be included although authorities may co-operate and coordinate their unilateral corrective responses. The other main difficulty that arises is that MOUs will generally include a 'public policy' exception that allows authorities to refuse to provide
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assistance or co-operation where this may otherwise violate domestic policy considerations.22 This may be triggered in any case where sovereign, national security or other essential interests may be effected. MOUs are accordingly of considerable value in facilitating inter-agency and cross-sector and cross-border co-operation although their limitations especially in terms of enforcement and public policy exception must be taken into consideration. They are of particular use in providing for the necessary exchange of relevant information although appropriate confidentiality obligations should be imposed both on the providing and recipient authorities with clear and express channels (or 'gateways') through which such information may be exchanged. Care will also have to generally be taken in drafting the terms of an appropriate MOU. Reference should be made to the IOSCO principles and existing model MOUs available.
2. Administrative law or Regulation

Rather than attempt to deal with inter-agency relations through an informal MOU, an administrative law or regulation may be considered, at least, for use at the national rather than international level. The obvious advantages are transparency and predictability as well as authority and enforceability. This may be of particular use where countries have less developed administrative laws. The opportunity may then be taken to formalize certain general principles and rights of action through such a law or regulation. The additional advantage created would then be in terms of confirming and clarifying the rights of action available by regulated entities and private parties against administrative agents. The most simple administrative law or regulation could provide for the identification of the agencies covered and appropriate definitions (such as 'regulatory authority', 'financial institution', 'relevant law', 'board' or 'governing body'). The law or regulation could then provide for the institution and board structure of the regulatory agencies (including appointment rules, composition, duration, prohibitions and procedures), management (including appointment, duration and duties), personnel, other divisions and committees or sub-committees and funding and budget. These provisions may not be considered necessary where they are already dealt with in each of the separate sector Laws and the decision has been taken to continue these in place.
22
See IOSCO Principles, Principle 6. 184 15 DECEMBER 2003
Further equivalent provisions to those that would otherwise be set out an appropriate inter-agency MOU could also be incorporated as this would include identification of relevant information, confidentiality obligations and exchange of information requests and procedures. Appropriate 'gateways' should be provided for. Immunity clauses may also be included to avoid regulatory agencies and their staff as well as appointed external parties from being held liable for loss caused otherwise than by action taken in bad faith or contrary to bank secrecy laws. Immunity is necessary to limit unnecessary and potentially penal liability on the part of regulatory authorities as well as to protect staff from intimidation or abusive threats of unmerited litigation. Staff protection is, in particular, necessary to ensure that appropriately qualified and experienced people are attracted and retained within the supervisory service. Additional rights of action should also be provided to ensure the proper judicial review of administrative action. This would be based generally on accountability through an express right of administrative or judicial review. This issue has become of particular importance in a number of countries where the supervisory authorities have been sued, in particular, by depositors or other creditors that have suffered loss as a result of the failure of a bank or other financial institution.23 It is accordingly essential to clarify the nature of the rights of action available and limits of potential review and liability. The adoption of an appropriately drafted administrative law and regulation may accordingly be considered more appropriate in the PRC rather than a more informal MOU. This would more clearly and formally clarify the relations between the authorities as well as create supporting rights of action against the statutory agencies at the same time as limit their potential liability within expected and reasonable grounds. If such an administrative or regulatory law or regulation is not to be adopted, an appropriate MOU should be entered into between the PBC and the relevant sector agencies.
23
The Bank of England in the UK is currently being sued by a number of the former depositors of BCCI that
have suffered loss as a result of the bank's closure in July 1991. The Bank is being sued for 10 billion in compensation. Preliminary hearings have determined that the action should proceed on the basis of the tort of misfeasance in public office. The trial date has been set to begin in January 2004. INTERNATIONAL LAW INSTITUTE 185 15 DECEMBER 2003
3. Single Regulator
The alternative to maintaining separate sector regulators and attempting to manage their relations would be to create a single authority for all financial market supervision and regulation. This would represent a considerably more fundamental form of revision but one that should be considered as an interim or longer-term option. Since 1986, over 29 countries have merged their supervisory functions either in whole or in part.24 Institutional and regulatory integration have become significant trends in recent years. The arguments for and against must accordingly be considered in the PRC and the relative potential advantages and disadvantages assessed. A number of advantages and disadvantages can be developed for and against the creation of a single regulator. Various general principles can also be developed against which effective regulation can be measured. These include proper objectives, full scope, necessary resources, cost effectiveness, effective enforcement, political independence and proper accountability. A number of separate policy, institutional and operational factors can then be compared in assessing whether a single or multiple sector based regulatory solution should be adopted. While a number of advantages and benefits can be identified in each case, a number of corresponding difficulties and costs can also be noted. In terms of relevant policy, the main advantages are policy integration, consistency, simplicity, ease of review and flexible development. Against this have to be considered possible lender of last resort and moral hazard confusion and extension, consequent lack of reputational incentives, loss of specialist service providers and the need for additional protection for focused or specialist interest groups. In institutional terms, improved administrative control, increased communication and contact, better allocation and use of resources, improved training and enhanced internal and external accountability have to be balanced with possible excessive size and administrative
24
Countries with single supervisors for all financial intermediaries include: Denmark; Estonia; Germany;
Hungary; Ireland; Japan; South Korea; Latvia; Malta; Norway; Singapore; Sweden; and the United Kingdom. Countries that have single supervisors for banks and insurers or banks and securities firms include: Australia; Austria; Canada; Columbia; El Salvador; Finland; Iceland; Jamaica; Luxembourg; Malaysia; Mauritius; Mexico; Pakistan; Paraguay; Peru; and Venezuela. Other countries considering adopting an integrated supervisory framework include: Bulgaria; Kazakstan; Poland; Slovakia; Slovenia; South Africa; the Ukraine; and Indonesia. See, Freshfields, How Countries Supervise their Banks, Insurers and Securities Markets (2001). INTERNATIONAL LAW INSTITUTE 186 15 DECEMBER 2003
complexity, potential conflicts of interest and regulatory culture friction, abuse of power, additional and specialist training demands and confused or reduced accountability. With regard to operational and implementation issues, operational efficiency (including economies of scope and scale, simplified management and administrative structure and improved expertise and experience), increased responsiveness, flexibility, reduced costs and the elimination of cross-sector competition have to be considered against any inherent operational inefficiency, supporting slow decision taking and response time, the danger of over-standardized responses, increased costs (in certain areas) and more general loss of regulatory competition and consequent incentive and internal accountability as well as high levels of concentration. A number of corresponding arguments for and against the construction of a single regulatory regime can be developed. The degree of relative advantage and disadvantage is dependent upon the relationships or effects of the particular regulatory decision taken having regard to all of the supporting financial, legal and administrative factors that characterize any particular legal system and economy. Whichever option is adopted (single agency or multiple agencies), certain adjustments will always have to be made to ensure that the consequent difficulties that arise are eliminated or, at least, reduced and managed. Provided that these limitations are properly identified and controlled, a single or multiple model may be workable in any particular country. The fundamental issue is possibly not then one of initial theoretical design or absolute model selection but of subsequent corrective adjustment. Different single or hybrid models have been tried in various countries. Australia has adopted a three-part system with the core functions of consumer protection, prudential regulation and systemic stability as well as payments system oversight being conferred on separate agencies. These also exchange information and co-operate through an umbrella agency. A more experimental tripartite objective rather than institutional or functional approach has accordingly been attempted in Australia. Japan has, in contrast, established a single regulator with its Financial Services Agency. The Financial System Reform Law was enacted on 5 June 1998 which amended 21 earlier statutes. Japan has also continued to operate on the basis of separate sector laws rather than attempt to integrate those at this stage. A similar approach has been followed in Germany where a single regulator has been created but legislative separation maintained. Korea is presently in
the process of integrating its separate laws, which are currently operating under a single regulator structure. The most fundamental regulatory reform that has taken place in recent years in any financial system has been in the UK. The incoming Labour Government announced in May 1997 that the structure and content of financial services regulation would be subject to fundamental revision. The Financial Services and Markets Act was subsequently adopted on 14 June 2000 and provided for the assumption of responsibility for the supervision and regulation of all other financial areas by the FSA and for the creation of a new integrated regulatory regime under the 'rules' and 'guidance' to be issued by the FSA. The FSA has since produced a full Handbook of Rules and Guidance under the powers conferred. This includes a number of general 'high level' standards, specific market sourcebooks and common 'process' manuals (including authorization, supervision and enforcement). Integrated redress is also provided under the internal and FSA complaints sourcebooks, as well as the creation of a single-appeal system & compensatory fund. The PRC may wish to continue on a separate sector agency and law based approach for a period. This would be supportable in terms of risk separation and consequent market stability as the economy moves from a managed to a market basis. As market practice and supervisory and regulatory experience develops, however, the PRC may wish to consider creating a single regulatory authority on the model adopted in a number of other countries. The particular advantage in the case of the PRC would be that this would focus personnel and funding resources to allow the agency to develop its capability, reputation and authority as quickly as possible.
J. Conglomerate Comment Certain comments may be made with regard to the position of financial groups and conglomerates under the current laws in the PRC. These are generally concerned with the extent to which the PRC has followed a single market, single regulator and single regulation approach to financial policy revision. More specific recommendations with regard to future legal and regulatory reform in this area are made in the following section.
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1. Separate Sectors
The current law in the PRC is based on sector separation. This follows the underlying policy of separate market, separate supervision. It must be accepted that this is a safe and prudent approach to follow certainly at this stage in the transition of the PRC economy from a managed to a market system. The disadvantage of this is that some of the economic benefits that may otherwise arise with a more open market policy may be lost. Of particular importance in this regard may be the ability of the larger financial groups in the PRC to restructure further and expand to allow them to compete with other large global conglomerates and financial groups especially after financial liberalization pursuant to its WTO commitment by end-2006. Of more immediate concern from the PRCs perspective, however, may be the fact that a number of increasingly complex groups have already been constructed or are proposed on the PRC mainland at the same time as certain larger groups have already used Hong Kong, SAR, China and other overseas centers to avoid the domestic regulatory constraints with regard to group structures. The current policy will then only limit innovation as well as promote regulatory avoidance. The PRC authorities may also find that they are not able to collect sufficient information about these non-mainland or other foreign based groups nor exercise any form of control on their activities if any concerns arise. The PRC should accordingly adopt a new law on financial groups (rather than financial conglomerates)25 to deal with all of the main issues identified. The most significant issue that then arises is whether this should take the form of a full US style financial holding company law or a less substantial registration, approval and oversight (supervision) system. The creation of all complex groups must be notified to the relevant authorities (the CBRC, the CSRC and the CIRC), each of which must be able to obtain all necessary information with regard to major shareholders and controllers as well as proposed business operations and structural, management and decision taking arrangements. Where appropriate, the authorities
25
The terms financial groups or complex groups or even financial holding companies may be preferable
to financial conglomerates at this stage to the extent that a restrictive approach is to continue to be followed, at least, for a period in the PRC. The term financial conglomerate may be considered to be misleading to the extent that financial entities will still not be allowed to undertake cross-sector activity within only more general ownership (holding company) rules being relaxed at this stage. INTERNATIONAL LAW INSTITUTE 189 15 DECEMBER 2003
must be able to refuse to allow certain holdings or interests to be acquired or, where they have been acquired, to direct that they be disposed or, at least, that no voting rights or other control are otherwise exercised. Updated information must also be provided on a regular basis to allow continuing oversight. The authority to be responsible for financial groups supervision must also be confirmed. As the new groups will consist of companies from more than one financial sector, a new regulatory agency would either have to be established or a new supervisory department set up within the PBC. While the PBC must have some enhanced oversight function in this area, it is questionable whether it would wish to re-assume a full day-to-day supervisory function or only responsibility for more general policy and operational and market stability oversight. Day-to-day oversight of single sector financial groups and financial companies should then remain with each of the existing authorities (the CBRC, the CSRC and the CIRC) although information on more complex financial groups should be transferred to a dedicated division within the PBC for central processing and oversight. If the PBC is to assume direct supervisory responsibility, the current proposed revisions to the PBC Law would have to be extended to include this new function. If the day-to-day tasks of collecting and processing prudential data were left with the existing sector agencies26 (with only financial group information being transferred to the PBC for review) this might fall within the PBCs more general new financial stability function, in which case express statutory power may not be required. To avoid any difficulties and potential challenge (or complaints) with regard to the proper scope of the PBCs responsibility this regard, it would be preferable if the
26
Each agency should, in practice, maintain a groups department or division to collect all necessary
information with regard to banking groups or holding companies, securities groups or holding companies and insurance groups or holding companies as appropriate. To the extent that necessary powers have not already been conferred in this regard under each of the existing financial Laws this should be corrected. This could be most easily effected through the inclusion of necessary amendment provisions in any new law or regulation in the financial group or financial holding company area. General information collection would then flow from the sector agencies up to the PBC. INTERNATIONAL LAW INSTITUTE 190 15 DECEMBER 2003
legal basis for this power were confirmed through the inclusion of some express provision in the revised PBC Law and in a new Law on Financial Groups.27
2. Separate Agencies
The PRC currently maintains a number of separate agencies for each of the main financial sectors (including the CBRC the CSRC and CIRC). Each of the agencies also operate through a number of separate provincial and city branches [realistically a problem?] with the consequent possible difficulty of both central and local political intervention or separate local commercial considerations being given preference over centrally agreed regulatory policy. It has to be accepted that it is unlikely that a new regulatory agency may be established prior to 2007 at the earliest for complex financial groups. The recent administrative reforms undertaken and closures or streamlining polices followed suggest that this would be politically unacceptable at this stage. Any regulatory revision should then take place within the institutional structures currently in place. It is nevertheless essential that some effective co-ordination mechanism is set up to allow the activities of all of the separate agencies involved to be conducted in a consistent and coherent manner especially in dealing with large complex groups. The simplest manner in which the roles of the existing agencies could be coordinated would be through the establishment of a new joint committee of representatives from each of the four main supervisory agencies. The committee could be referred to as the Joint Financial Stability Committee to reflect its general functions and responsibilities. A senior representative should be appointed to chair the Joint Committee at either State Commissioner or Vice Prime Minister level to ensure that the Joint Committee has sufficient political authority to carry out its functions effectively in practice. This would be particularly necessary in dealing with provincial supervisory branches and local government bodies to ensure that the agreed policy was followed in all cases and at all levels.
27
This should give the PBC legal power to oversee and supervise financial holding companies although the
manner in which this is conducted should be left unspecified. This would then allow the PBC either to supervise such institutions directly or only through the existing sector agencies or (most likely) through a combination of approaches which may be adjusted over time with changes in market structure and operation and as the PBCs experience and expertise develop. INTERNATIONAL LAW INSTITUTE 191 15 DECEMBER 2003
The main function of the Joint Committee would be to oversee financial stability more generally, which would include policy co-ordination and confirmation of major operational decisions with regard to large financial groups. The day-to-day collection and examination of information obtained from financial firms and financial groups would continue to be discharged at the sector agency levels with the CBRC, the CSRC and the CIRC then transferring necessary group information to the Joint Committee as appropriate. It may also be of value to include the Ministry of Finance (MOF). The administrative staff for the Joint Committee should preferably be based at the PBC. A new Financial Groups Division could be established within the PBC to carry out these functions including preparing working and report papers for the Joint Committee. This Financial Groups Division could be set within a larger new Financial Stability Department which would be responsible for all financial market related matters within the scope of authority of the PBC. (It is understood that the PBC was already considering setting up a special Financial Stability Bureau which could assume this function under the proposed revisions to the PBC Law.) As well as act on behalf of the Joint Committee, the new Financial Stability Department within the PBC could be expanded to carry out other tasks including general oversight of financial market stability within the PRC and Joint Committee work (including financial group supervision) as well as policy co-ordination and possibly also market support (lender of last resort) decisions and financial recovery (insolvency or restructuring).28 As the new Joint Committee will be served by the staff from the PBCs new Financial Stability Department within the PBC, it would also be of use for the Governor of the PBC to be appointed co-chair or vice chair. The following diagram is a representation of this committees potential composition. A Financial Groups Division (FG Div) from each of the four financial regulators would be represented in the Committee, as would a Financial Restructuring Division
28
A series of separate divisions may then be set up as part of the new Financial Stability Department
including a Financial Stability Division (responsible for general market oversight), Financial Groups Division (financial group supervision), Financial Market Division (emergency funding decisions (lender of last resort)), Financial Recovery Division (financial group restructuring and reconstruction) and Financial Insolvency Division (closure of financial holding companies and groups). Some of these divisions may not be large possibly only involving one Section Chief although others may be more substantial including the Financial Stability Division and Financial Groups Division. See Diagram, Appendix 5, Section E. INTERNATIONAL LAW INSTITUTE 192 15 DECEMBER 2003
(FR Div) from each of the CBRC and PBC, and a Financial Insolvency Division (FI Div) from the CBRC to handle winding-up operations and a Financial Support Division (FSu Div) from the PBC to manage an LOLR facility, if required.
PBC Governor State Council Commissioner
Complex group monitoring, Problem-institution rehabilitation & Stability coordination
Joint Financial Stability Committee
PBC
FG Div FSu Div FR Div
MOF
CSRC
FG Div
CIRC
FG Div
CBRC
FG Div FR Div FI Div
While this Joint Committee approach may be of value for a period, the PRC may also wish to consider setting up a single financial agency at some later date. This could be most simply referred to as the China Financial Regulatory Commission (CFRC). The CFRC would then assume the functions and responsibilities (as well as staff and other resources) of the existing separate sector based Commissions. Even if a single authority were set up, the separate functions of the PBC would still have to be clarified and the relationship between the PBC and the new single Commission confirmed. The proposed Joint Committee would accordingly be continued with its membership being cut only to include the PBC, the CFRC and the MOF, with possibly a senior State Council representative to provide it with sufficient political authority to allow it discharge its functions effectively.
3. Separate Laws
The current policy of separate market, separate supervision requires that the existing distinct financial laws are kept in place and that financial market supervision continues to be conducted on a sector basis. If the PRC decides to establish single CFRC, it may also then consider revision of existing sector laws and adoption of new single financial law (as has been done in the UK and as is currently being undertaken in Korea).
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There would, of course, be no need to revise this underlying policy of separate market, separate supervision even with the establishment of a single CFRC. Each sector could simply be dealt with by a separate department within the CFRC. The advantage of this is that significantly closer relations could be constructed across the major sectors and policy and operational decisions coordinated more easily and effectively. This will become of even more value and importance as the traditional distinctions between the main sectors continue to break down and as markets, market products and market services become increasingly inter-changeable and cross-substitutable. It is partly for this reason that a number of countries have already moved towards the creation of a single regulator and the increased levels of policy co-ordination and consistency that this allows. This is something that the PRC should certainly consider within the next five to ten years. The establishment of a single regulatory Commission would not, as noted, require any immediate change in the existing separate sector policy adopted although this could be further reviewed over time. Depending upon how financial markets on the mainland and within Hong Kong, SAR, China and Taiwan, China developed as well as more globally, the PRC may also wish to replace the existing sector laws with a single financial regulatory law (or financial financial law or financial market law). The PRC may ultimately then decide to move to a policy of full-agency (institutional) and regulatory (rules) integration, although this would only be over time and as market structure and practice developed and as experience and confidence with its new regulatory system evolved. This would again not necessarily require that all financial sectors were fully integrated. The PRC would continue to have full control over the activities of financial firms and the structure of financial groups and would be able to relax cross-sector restrictions when and as it considered appropriate. It would only be that a single integrated regulatory framework would be constructed to allow more consistent and flexible control to be given effect and adjusted over time. If the PRC did decide to move towards a single-agency (institutional) and single-regulatory (rules) policy, one of most useful models would then be the new fully integrated system of financial supervision and control set up in the UK under the Financial Services and Markets Act.
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FINAL REPORT, SECTION VIII BANK INSOLVENCIES
VIII.
BANK INSOLVENCIES
A. Introduction The NPC, the State Council and the PBC are currently considering the policy and operational procedures available in setting up a revised corporate insolvency within the PRC that will also apply to banks and other financial institutions. The revision of insolvency procedures under the Bankruptcy Law for State Owned Enterprises has been considered for some time although a number of difficulties have arisen in adopting any final measures. The latest recommendations are currently being considered by a Standing Committee of the NPC. The purpose of this section of the Report is to examine the main issues that arise with regard to the design and structure of a bank and financial insolvency law. The key procedural or operational options available are examined including the relative advantages and disadvantages of each of the main resolution mechanisms generally used in other countries. These are reviewed, with particular regard to the current financial and economic conditions in the PRC. The fundamental difficulty that has to be considered is the need to balance the requirements of both a planned and market-based economic system as well as to provide effective transitional and continuing mechanisms that can operate on a short and long term basis. As the PRC moves towards a market economy, within a planned-market system, a series of adjustments may have to be considered to the main operational options otherwise available. These would apply on a transitional basis while certain existing economic difficulties are resolved including, in particular, the large volume of NPLs within the financial system. In carrying out these reforms, the growth and stability of financial markets must be protected at the same time as the rights of the State and individuals properly respected. The new adjusted market place must also operate internally as well as continue to attract substantial external investment to allow the PRC to participate fully in the new international trading system operating under the auspices of the WTO.
* The content of this section was prepared by George Walker, with support from Douglas Arner, Liguo Cui and Changyuan Lin.
B. Summary Conclusions and Recommendations The main conclusions and recommendations made with regard to bank insolvency can be summarized as follows:
General Policy (1) An effective exit (insolvency) policy must be adopted to deal with inefficient banks and
other financial institutions based on a new of Law on Bank Restructuring and Liquidation. (2) This should outline the main procedures available but also include a series of general
principles concerning the operation, purpose and function of the law. Supporting regulations should be considered that would contain further procedural and operational details. (3) Significant administrative power and discretion should be conferred to allow the system
to operate in as quick and efficient a manner as possible although the main stages in any formal process should require court consent. This is necessary for transparency, validity (authority) and finality reasons. Court involvement should nevertheless be limited to apply only at key stages in the each process (including commencement, approval of property rights adjustments and distributions and termination). The system should also operate within strict time limits to avoid unnecessary delay and cost with judicial discretion being restricted through strict drafting to provide legal predictability and limit abuse. A separate insolvency court is not necessary at this stage unless any major concerns arise with regard to expertise, delay or abuse in practice of the general court system.
Agency Responsibility (4) Bank restructuring and liquidation should be conducted through a specialist department
(or division) within the CBRC. Transferring this function to an independent insolvency agency would not be desirable at this stage due to the separate funding, staff and training required and loss of contact and familiarity of CBRC staff with relevant institutions.
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(5)
A separate oversight division should also be set up within the PBC (to be referred to as
the Financial Restructuring Division (or Financial Resolution Division), which would operate within a new Financial Stability Department). The function of the Department generally would be to monitor the financial soundness of the banking and financial sector, which would also include the oversight of the restructuring of any major bank or financial group within the specialist Financial Restructuring Division. (6) In the event that difficulties arose with regard to the soundness of an individual bank, this
would initially be managed within the restructuring department (or division) within the CBRC. If the matter could be dealt with by the CBRC, the PBC would not be involved further and would only be advised of the manner in which the matter was finally resolved. If further action were required (including the possible provision of financial assistance by the PBC) this would be coordinated through the Financial Restructuring Division and the other divisions within the Financial Stability Department.
Joint Review Committee (7) Coordinated action between the CBRC and the PBC would be supported by a joint
review committee (the Joint Financial Stability Committee)1 made up of representatives of the PBC and the CBRC as well as the MoF. The restructuring of more complex financial groups would also be coordinated through the Joint Committee with representatives of the CSRC and the CIRC also attending. (8) The Committee would be chaired by a State Commissioner and co-chaired by the
Governor of the PBC. It would report directly to the State Council. Administrative support would be provided through the Financial Groups Division of the Financial Stability Department within the PBC. (9) The main function of the Joint Committee would be to consider whether the financial
condition of any individual institution created any significant concern and the appropriate action to be taken. This would include determining whether the collapse of an individual institution
See Joint Committee established in accordance with Chapter VII.
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would create a systemic threat to the financial system. The effect of the closure of the entity on other institutions would be examined and the possibility of any financial contagion assessed. While particular tasks would continue to be carried out by relevant divisions (or sections) within the sector agencies, these functions would be monitored by the Financial Stability Department within the PBC with any common decisions being taken through the Joint Financial Stability Committee.
Insolvency Mechanisms (10) The new Law on Bank Restructuring and Liquidation should provide for three main
insolvency procedures consisting of administration, restructuring (rehabilitation) and liquidation. Administration and liquidation would require court consent although restructuring would only require court involvement where any property rights or claims were adjusted without consent (para 3, above). (11) Three parallel tests would be used for administration and liquidation proceedings
consisting of liquidity insolvency (unable to pay debts as they fall due), balance sheet insolvency (where liabilities exceed assets) and capital insolvency or regulatory insolvency (where set capital levels are breached). Other tests may also be used. These could include license revocation or more general public interest (either threat to the safety and soundness of the bank or on just and equitable basis). The first three (and license revocation) would apply on an automatic and compulsory basis while the other (public interest grounds) would be discretionary, which would limit uncertainty and delay (paragraph 3, above). (12) The right to apply for an administrator or liquidator to be appointed would be available to
the bank, its directors, a creditor and the CBRC (and the PBC in the event that the CBRC refused to act without proper cause). An application by creditors for a liquidator to be appointed should require, at least, two parties.
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The CBRC (and the PBC) would be able to oppose any petition wherever they considered inappropriate to close an individual bank (such as where the claim could otherwise be satisfied or where the closure of the institution would create a systemic threat).
Insolvency Procedures (13) Administration would allow a bank to be managed for a set period (subject to extension)
under the control of the CBRC or an externally appointed third party. The assets of the bank would be held by the administrator and the bank legally protected from other third-party enforcement proceedings during the course of the administration. The administrator would be responsible for the management of the business of the bank until the financial-difficulties experience had been resolved. The administrator would prepare a report on the conduct of the administration, which may include recommendations for some more formal restructuring or for the closure (liquidation) of the institution. (14) Restructuring or rehabilitation would be managed through the restructuring department
(or division) within the CBRC. The objective would be to produce a rehabilitation plan or program to allow the institution to deal with any financial difficulties and avoid closure. The restructuring plan may be prepared by any party (including bank management, shareholders, creditors, the administrator (if appointed) or the CBRC). The restructuring plan may include any one or more of a number of mechanisms including secured or unsecured borrowing, liquidity or capital injections, asset or liability transfers and share transfers (mergers and acquisitions or new bank transfers). The purpose is to provide for a range of flexible and cost effective resolution devices or potions to allow a bank (or other financial institution) to continue in business. (15) The function of the CBRC in relation to rehabilitation would be to assess the validity of
any plan produced and determine whether it would be in the interests of the bank or the general public interest to proceed. In the event that a plan or program required individual property or financial rights (claims) to be altered in some way (with the relevant consents not being available), court approval would be required. Approval would again be considered having regard to the interests of the bank and the general public.
(16)
Direct financial assistance may also be provided by the PBC (under a general or
emergency lender-of-last resort procedure). This is distinct from restructuring to the extent that this is dependent on existing bank or third party rather than official support. Financial assistance would generally only be considered in the event that no separate restructuring or rehabilitation was possible or had already failed. The provision of such assistance could be coordinated through a separate Financial Support Division within the Financial Stability Department in the PBC although this would coordinate with the Financial Restructuring Division and the CBRC. Any joint decisions would again be taken through the Joint Financial Stability Committee. (17) In the event that the institution could not be rehabilitated and the provision of direct
financial assistance was considered unnecessary or inappropriate, formal closure proceedings would begin. Again this would generally require court consent although the grounds would be set out in the Law with the court to avoid unjustifiable refusal where the conditions were satisfied. (18) Closure would be carried out through a simplified liquidation procedure with the
appointment of a single liquidator (rather than a liquidation team) to allow for a quick and effective realization of the assets of the bank and payment of outstanding liabilities in accordance with the priority rules set out under the Law.
Powers and Duties (19) All appropriate powers and duties would have to be conferred on administrators and
liquidators as appropriate. These should be set out in the new law to ensure certainty and transparency. Additional provisions should also be included with regard to such matters as reports, records, notice, review or appeal, immunity from prosecution as well as enforcement of crossborer orders or proceedings under any relevant international treaties, conventions or other arrangements. Review
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(20)
The operation of the new restructuring and recovery processes should be monitored and
reviewed over time with any necessary revisions or amendments being made as appropriate. Further reforms should only be considered to the extent that financial market developments and improvements in supervisory and regulatory experience and practice permit. The overall objective must be to ensure that the PRC is able to promote the continued safe and stable expansion of its financial markets and financial system at the same time as prevent any avoidable crisis or collapse.
C. PRC Law and Practice The insolvency of financial institutions is governed by a number of separate laws at the present time in the PRC. There is no single or special insolvency law for financial institutions, nor a single bankruptcy system for enterprises generally. SOEs are dealt with under the Law of the People's Republic of the PRC on Enterprise Bankruptcy of 2 December 1986. This provides for a declaration of bankruptcy where enterprises demonstrate poor operations and management resulting in serious losses with the entity being unable to repay debts (article 3).2
2 This is referred to as liquidity insolvency for the purposes of this Report. The other key tests (or triggers) are balance sheet insolvency (where liabilities exceed assets) and capital insolvency or regulatory insolvency (where required capital levels are breached). Equivalent definitions are used in the forthcoming joint report to be issued by the World Bank and IMF on, Legal, Institutional and Regulatory Framework to Deal with Insolvent Banks (Draft, August 2003) [Joint Report on Bank Insolvency]. The paper was prepared as part of the Global Bank Insolvency Initiative (GBII) originally launched in January21002 in coordination with the Bank for International Settlements (BIS), the Financial Stability Institute (FSI), the Basel Committee on Banking Supervision and the Financial Stability Forum (FSF). The report sets out the principal elements of the legal and institutional framework required to deal with insolvent banks and follows an extended consultative exercise conducted by the World Bank and IMF between January 2003 and July 2003. The original principles of the GBII were (a) to identify the appropriate legal, institutional and regulatory framework for addressing cases of bank insolvency, (b) to build an international consensus towards the acceptance of this framework and (c) to provide a basis for a policy dialogue between international financial institutions and countries on these issues and to facilitate provision of technical assistance to countries that wish to improve their national legislative and regulatory systems. This section was prepared before the Joint Report paper was released although it is fully consistent with all of the recommendations contained in the Joint Report. See also Basel Committee on Banking Supervision, Supervisory Guidance on Dealing with Weak Banks, March 2002; and IMF, Orderly & Effective Insolvency Procedures (1999). The Basel Committee paper was prepared by a Task Force on Dealing with Weak Banks and was concerned with the definition and identification of weak banks and the development of possible resolution options. The IMF paper was prepared by the Legal Department (LEG) of the IMF. In addition to considering the various stages and procedures available (including rehabilitation and liquidation), the paper examined the general objectives and features of insolvency procedures and includes a number of 'principal conclusions' through the text. The UNCITRAL Moral Law on Cross-Border Insolvency is also attached as an Appendix to the IMF paper.
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Other enterprises are subject to the liquidation and bankruptcy proceedings set out in the Civil Procedure Law of the PRC of 9 April 1991 (Chapter XIX). This allows creditors of an enterprise to apply to a People's Court to declare the debtor bankrupt where the enterprise has suffered serious losses and is unable to repay its debts (article 199). A liquidation team may then be established to value and dispose of property and distribute the assets (article 201). The Law contains separate provision for enforcing compromise agreements (article 202). The Supreme People's Court has since issued a series of interpretations on enterprise bankruptcy including the 'Provisions on Some Issues concerning the Trial of Enterprise Bankruptcy Cases' of 18 July 2002 which came into effect on 1 September 2002. The objective is to establish a consistent understanding of the Law on Enterprise Bankruptcy and the relevant provisions in the Civil Procedure Law. Separate provisions are contained within other specific laws including the Commercial Bank Law,3 the Securities Law,4 the Insurance Law,5 the Trust and Investment Law,6 and the Company Law. 7 Further measures are also provided for in connection with foreign funded financial institutions, financial leasing companies, enterprise group finance companies and rural credit co-operatives.8 While certain general provisions are included, such as with regard to the use of a debts test (inability to pay debts), consistent and coherent procedures are not provided for financial institutions. A series of further operational difficulties also arise in practice in the insolvency area. These are generally concerned with the lack of market discipline and of awareness of the proper function and value of insolvency proceedings within a market economy. Specific problems identified include the failure of borrowers to repay loans without sanction or enforcement, the
3 4 5 6 7 8
The Commercial Bank Law, articles 71 and 72. The Securities Law, article 19. The Insurance Law, articles 87-89. The Trust and Investment Law, article 18. The Company Law, articles 189 and 196. See Regulation on Administration of Foreign-Funded Financial Institutions; Measures of Administration on
Financial Leasing Companies; Measures of Administration on Enterprise Group Finance Companies; and Rules of Administration on Rural Credit Co-operatives. INTERNATIONAL LAW INSTITUTE 202 15 DECEMBER 2003
failure of banks to make full provision for value-impaired assets (loss provisions), the ability of enterprise debtors to carry unpaid deposits at full value on their books, the full official repayment of individual deposits held with insolvent banks (in the absence of any separate deposit protection scheme) and the lack of effective sanctions against or incentives for managers and shareholders of insolvent institutions.9 The first difficulty is generally concerned with lack of proper credit determination being made by banks on the initial advancement of credit. This is clearly a significant problem with regard to state-owned banks which has resulted in significant levels of NPLs arising. This problem may then be aggravated by the lack of any effective enforcement policy within financial institutions. Apart from these asset side problems, more significant difficulties arise on the liability side of the balance sheet, in particular, with the lack of effective market discipline and sanction being applied to poorly run institutions. The last three operational difficulties referred to are all concerned with market discipline failures by individual and corporate depositors as well as managers are shareholders. Managers should be rewarded for good practice and success at the same time as disciplined for poor performance. Shareholders must monitor and discipline management while depositors should oversee the safety of their funds and, if necessary, transfer them to another bank or depository institution. Financial institutions should be judged in terms of their performance and punished for bad practice. Financial regulation will ensure that institutions are established and operate in a safe and prudent manner. Regulatory sanctions must nevertheless be supported by market discipline which includes the risk of insolvency and closure. The general purpose of bank and financial regulation (as opposed to insolvency) is to establish a series of market entry conditions to ensure that financial entities are properly structured, capitalised and managed. Such institutions must then be operated in a safe and prudent manner on a continuing basis. This is the basic function of authorisation (or licensing) and continuing supervision.
This issue of moral hazard is particularly severe as it applies with regard to both depositors (who have no
incentive to monitor and sanction banks through the withdrawal of funds through the availability of de facto full deposit protection) and mangers and shareholders who have no threat of loss. It is essential that relevant and effective incentives are created to allow proper market principles to apply and operate. INTERNATIONAL LAW INSTITUTE 203 15 DECEMBER 2003
These regulatory controls on market entry must then be supported by necessary exit rules including effective bank insolvency procedures. Inefficient and poorly run institutions must be restructured or closed with their liabilities and assets either being assumed by other institutions or distributed to depositors and creditors. The two main existing procedures applicable to banks are the assumption of control and bankruptcy provisions set out in the Law of Commercial Banks. The PBC can assume control over a bank where it may suffer a credit crisis seriously affecting the interests of depositors (article 64). The objective is to protect the interests of depositors and enable the bank to resume normal business. Although orders may be continued, the maximum period for this statutory intervention is two years. Control terminates when the bank is either able to resume normal business or merged or declared bankrupt (article 71). A People's Court may then issue an order declaring the bank bankrupt where it is unable to pay its debts (article 71). The assets of the bank will be realized and depositors and other creditors paid (in priority of wages, employee benefits, liquidation expenses and individual deposits). Little guidance is, however, provided with regard do the detailed application and operation of these procedures in practice. Further confusion may arise if one or more of the other solvency or bankruptcy procedures available are also triggered (such as under the Company Law or the Law of Civil Procedure). Inconsistency may again arise depending upon the nature of the financial institution and whether any of the other financial laws apply. A series of deficiencies accordingly arise with regard to the structure, content and operation of the insolvency laws in the PRC in the financial area. The initial tests or triggers are inadequately defined and articulated, the rights of parties to petition unspecified and relevant procedures undeveloped. A single series of alternative but coherent and consistent mechanisms or procedures should be available, depending upon the severity of the financial difficulty being experienced by the financial institution concerned. These procedures may then be either protective or rehabilitating in nature or both but also supported by full closure rules where necessary. The relationship between statutory insolvency procedures and other market support mechanisms such as central bank liquidity or emergency provision (lender of last resort) and deposit protection schemes should also be considered. A consistent, or least, parallel framework should be set up across the financial area.
The basic issues that arise in designing an insolvency law, in particular, in the financial area are considered in the following sections. The purpose is not to be prescriptive and recommend the adoption of any specific procedure within the PRC. The objective is, rather, to outline possible options for consideration and assessment having regard to the specific needs of the PRC economy and the underlying political and market system in place. Detailed recommendations are then made in the final section.
D. Insolvency and Bank Insolvency Procedures Corporate insolvency law is generally concerned with the distribution of available assets of an institution to its creditors following dissolution. The dissolution is often determined by more general corporate or company laws with asset realization and distribution being effected in accordance with relevant insolvency law rules. This can generally be considered to constitute a form of asset and liability resolution. The assets of the institution are realised and distributed to discharge outstanding claims either on a full, an agreed priority or proportionate basis or combination of these. Bank insolvency may either then be dealt with under a general liquidation or bankruptcy law or through some more specialist dedicated laws or procedure. Where established appointment and recovery procedures are in place with suitably qualified staff are available to manage the relevant procedures, bank insolvency can be conducted under the general law. In the event that an effective general insolvency culture is not available, a dedicated or specialist regime may be considered more appropriate in light of the special characteristics and importance of bank insolvency. Bank insolvency is of importance in light of the essential role that banks carry out in any economy. Banks perform a range of savings, credit and payment functions without which any market based economy could not operate. 10 Banks are also an important source of available employment and generate significant wealth as independent commercial sectors within most economic systems. Apart from the importance of the underlying economic functions discharged, the difficulty that arises with regard to banking markets is that they are inherently unstable and susceptible to collapse. Banks essentially create an inherently non-disposable or non-transferable
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asset pool in the form of bank loans supported by sight or on demand borrowing or credits. A fundamental term or maturity mismatch (or transformation) then arises between the short-term nature of the funding and long-term nature of its application. They generally retain a reserve (historically one third of their deposit base) in the form of cash or other easily liquidated assets to cover anticipated on-going withdrawal demands. A typical bank balance sheet may then be made up of 70-75% loans and 30-35% cash or easily disposable securities usually in the form of Government bonds or bills. This reserve may nevertheless be exhausted in the event of an unexpectedly large amount of withdrawal demands being made within a short period of time. In such an event, the bank will either try to obtain further funds from other institutions on the inter-bank markets or directly or from the central bank either through its general operations in the primary money market or on an individual (lender of last resort) basis. The central bank will advance secured lending to illiquid but solvent banks. Funds will only be advanced to insolvent banks where their collapse may otherwise create a systemic threat to the financial system. The other particular characteristic that has to be taken into account in considering bank rather than general insolvency is that the primary assets held in the balance sheet of a bank are financial claims (mainly loans but also some securities). These do not have the same characteristics as physical goods or otherwise easily disposable assets. Under the laws of many countries, intangible claims are difficult to transfer with onerous obligations generally applying. (Under the Law of Property Act 1926 in the United Kingdom, such transfers can only be affected by legal assignment which requires that the sum involved is unconditional, the transfer is effected in writing and all debtors properly notified. It is often impossible to satisfy all of these conditions including, in particular, non-conditionality in a modern market system. The requirement for individual debtor notice also causes significant administrative inconvenience in the event of the collapse of a large bank.) In considering bank insolvency, the importance of the underlying functions carried out by banks are relevant although the key issues are the need to prevent systemic collapse within a financial system and, where appropriate, to facilitate a speedy rescue or support operation before the credit and consequent asset position of the bank is unduly threatened. The decision as to
10
See also Joint Report on Bank Insolvency, para 1.4. 206 15 DECEMBER 2003
whether a restructuring or support operation of some form is to be effected must be taken quickly. In practice, this should be decided within the first two to five days of any significant threat arising with regard to the stability of the bank. If some form of support or rescue operation is to be effected and it has not been put in place within that time period, the asset position and credit standing of the bank may be significantly if not irremediable damaged. Every effort must also be made more generally to protect the value of the assets of the bank if any difficulties arise. Residual reserve assets should be protected from unnecessary dissipation while the credit standing of the bank more generally is supported to prevent or limit the damage caused by a bank run. In designing a bank insolvency law, the need for possible support, early resolution and asset protection must all be taken into consideration.
E. Court and Administrative Based Systems One of the main policy issues that has to be determined in setting up any general or special bank or financial insolvency regime is whether it should operate on an agency (administrative) or court (judicial) basis. An administrative procedure generally operates on an extra-judicial basis with commencement and appointment decisions being taken by the supervisory agency directly without any formal court approval or involvement. This may be conducted by or in co-operation with a deposit protection or insurance agency although this is unusual where the deposit support system only consists of a 'pay box' form that makes payment to entitled depositors with little active oversight or involvement in the resolution process.11 A judicial based system requires that the decision on the commencement of the proceedings and the appointment of the conservator, administrator or liquidator is taken by a court with the proceedings then generally continuing under court oversight. The court will accordingly be involved at the initial, continuing and termination stages. The advantages of an administrative process are that it is considered to be more flexible and immediate, protective, more accurate and informed (relying on specialist insolvency
11
On the nature of the structure and operation of deposit protection schemes, see Financial Stability Forum [FSF],
Report on Guidance on Deposit Insurance (2001). INTERNATIONAL LAW INSTITUTE 207 15 DECEMBER 2003
practitioners rather than non-trained judges) and consequently more efficient and effective. The disadvantages are that the system is more costly and potentially bureaucratic, non-transparent and lacks proper due process with the rights of private parties being cancelled or adjusted without formal legal approval or authority. Conferring claims-adjustment authority on a noncourt based agency is considered to be unacceptable in a number of countries as it undermines the legitimate rights of private parties. This objection can be partially corrected through the adoption of appropriate appeals or review procedures within an administrative system. The availability of such procedures, of themselves, however can then create further significant delays and obstruct the supposed advantages of immediacy and flexibility otherwise available under an administrative option. A major developed country that has retained an effective extra-judicial resolution system is the United States, which is effected through its Federal Deposit Insurance Corporation (FDIC). The FDIC is a well-funded and well-staffed administrative institution that has been able to develop significant experience since the early 1930s in the management of financial crisis and bank resolution situations. The operations of the FDIC are also supported by an extended system of administrative laws, rules and regulations in the United States with relevant core procedures having been further revised and adjusted over time. Few other countries have as an effective an administrative agency with as clear and developed a supporting body of laws, rules and regulations. Switzerland has also considered transferring bank insolvency from a court to an extrajudicial regime and this is supported by an effective administrative law and appeals procedures that will protect the interests of shareholders and creditors. Other extra-judicial regimes operate in such countries as Italy and Norway although most other European and developed Western economies operate on a judicial rather than administrative basis. Difficulties have arisen in other smaller or emerging economies such as the Philippines and Moldova, where sufficiently strong supporting legal and administrative procedures are not in place. The general tendency in many countries has then been to adopt some form of court-based system or, at least, court-supported regime. The principal advantages of a court-based system are that it has immediate authority and validity, which is particularly important with regard to interim measures and property or claims
adjustment. Any decisions taken are supported by necessary enforcement and sanction mechanisms with full due process applying at all times including proper notice and hearing. A court-based system also generally provides for finality and completion, which may not be otherwise available under an administrative regime. The potential disadvantages are possible delay, cost and lack of commercial or specialist technical expertise. These issues can be dealt with through special short summary procedures and the setting up of specialist courts if necessary. Apart from an express administrative or court-based option, some from of hybrid system may also be adopted. This would involve assigning as much administrative discretion as possible to the relevant insolvency agency but with all significant decisions being subject to court approval or confirmation. This would then combine immediacy and flexibility with authority and validity. This would apply to such stages as commencement, interim measures, disposal, enforcement and completion. Other more administrative matters could then be dealt with on a delegated basis including procedural conditions, management operations, meetings and negotiations, compromises, collections, interim and final payments. The two key issues that arise from an operational perspective are, then, authority and finality, which require court involvement. Any underlying property or claims adjustment must be subject to core approval or confirmation. Full due process must be respected in all cases. This can nevertheless be affected without any unnecessary cost or delay by only requiring minimal decisions to be referred to a judicial authority and with the court's discretion being limited under the relevant laws and regulations. An appropriate combined or hybrid model can accordingly be constructed that attempts to achieve the main benefits from both policy options. This is probably the most desirable compromise option, in practice, that benefits from the advantages of both of the pure model regimes. Whether a separate court should be established for insolvency purposes and, in particular, bank insolvency depends upon the state of development, credibility and effectiveness of the existing court system. If the courts are considered to operate sufficiently quickly and credibly with judges having a necessary degree of relevant general experience this may not be considered necessary. If any concerns arise in this regard, specialist insolvency courts should be set up.
While these would operate within the general court system, judges would be given specialist training with separate procedures being set up to govern their operation. Whether any separate bank insolvency rather than general insolvency courts would be required would also depend upon expected usage. Separate specialist courts may not be required where a sufficiently large amount of relevant business was nor involved although separately trained judges may be of use in such cases. A substantial amount of experience may nevertheless not be required as the discretion of the judges would be restricted under the relevant laws and regulations to avoid delay or interference. Local conditions and opinions could have to be considered further to determine whether a special insolvency court system should be set up within the PRC although this is unlikely at this stage.
F. Policy Options A range of policy options may be identified in developing a new insolvency law in the banking area. These include conservation (or asset protection) managed under a conservator, administration under an appointed administrator, restructuring or rehabilitation, voluntary and compulsory liquidation and bankruptcy. Which resolution option or mechanism would apply in any particular case would depend upon whether the relevant triggers set were satisfied or not. These generally include not being able to pay debts as they fall due (a liquidity test), assets exceeding liabilities (an insolvency or balance sheet test) or a capital falling below prescribed levels (a regulatory test). Other factors may include license revocation or the business otherwise being conducted in a manner considered prejudicial to the interests of shareholders or credits. The tests or triggers set with regard to each resolution option would be adjusted to ensure that they operate in a consistent and coherent manner. The resolution mechanisms available can be classified in different ways with various combinations being adopted. The simplest functions discharged are asset protection (conservation), interim administration (for a limited period under protection against creditor actions) which may include restructuring and closure (voluntary or compulsory liquidation). Conservation and administration may also be combined with the insolvency agency having
power to appoint an administrator to carry both an asset protection and interim management or rehabilitation function. A separate full bankruptcy procedure could also be included which would allow third parties to petition the court for bank closure. Mandatory liquidation and bankruptcy can nevertheless be combined depending upon whether the supervisory or insolvency agency is to be given power to appoint a liquidator directly or whether an appointment would require court approval in all cases. If the appointment requires court consent, these two mechanisms could be combined with both the supervisory or insolvency agency and third party creditors being able to apply to the court for the commencement of the relevant procedure. A separate agency-appointed liquidator and court commenced bankruptcy procedure would then be unnecessary. The nature of possible support operations, including central bank lender of last resort funding and other rescue options, must also be considered. Additional restructuring or rehabilitation options may include shareholder, third party or central bank capital injections as well as other asset transfers (to an existing or special purpose bank) or share transfers (mergers or acquisitions). The main resolution procedures are considered next. Possible support or rescue options are examined in the following section.
1. Conservation
The purpose of conservation is to allow the central bank or supervisory agency to assume control of a banks assets, books and records. This will allow the assets and the value of the bank to be protected as a going concern. This will either operate on an interim basis until the financial difficulties involved are resolved or until another, formal insolvency proceeding is commenced. Appropriate triggers would have to be imposed. These would generally include: (1) not being able to pay debts as they fall due, (2) capital falling below 25% or (3) liabilities exceeding assets. One or more of these could be used depending upon the regulatory obligations imposed under the Banking Law. Additional automatic grounds would also include (4) the bank's authorization or license has being revoked or (5) a petition being made for the voluntary or mandatory liquidation of the bank. The objective in each case would be to have a conservator appointed immediately to protect the assets and value of the bank as a going concern. A further
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test could also be included where (6) the interests of depositors or creditors otherwise justified this. While the first three triggers could operate on a discretionary basis, the following three should be mandatory. It would also be preferable if the first three were automatic as this would remove any discretion on the part of the regulatory or supervisory agency. The retention of unnecessary discretion creates the danger of forbearance and consequent delay with the supervisory or insolvency agency being reluctant or hesitating to proceed. The use of mandatory triggers in certain cases creates certainty and predictability for regulated institutions and officials. Some additional discretionary triggers may also be included such as where the bank fails to carry out a regulatory or administrative order, direction or instruction or this may otherwise be considered appropriate in the interests of shareholders or creditors. As well as allow additional asset protection, this would also support the other sanctions exercised and authority of the supervisory or regulatory agency more generally. An appropriate (conservator) appointment procedure would have to be provided for. The immediate appointment would generally be effected by the supervisory or regulatory agency to ensure a quick and effective response. The effect would be to suspend the powers of the management and shareholders of the bank subject to the direction or instruction of the conservator. The powers of the conservator to enter the premises of the bank and take control of all assets, books and records would be provided for. The conservator would be subject to an obligation to examine the condition of the bank and prepare a report within a specified period such as 30 days. This would include producing recommendations for the rehabilitation or possible closure of the bank. To ensure proper due process and validity of the action taken, some form of court consent should be required. Pre-consent would not be desirable unless this could be provided immediately on application by the supervisory or regulatory authority. Otherwise court consent should be obtained within a period of 1 to 5 days following the appointment of the conservator. Court approval would also be required in connection with any action taken by the conservator that would affect the rights of third parties. Court consent would be required in all cases where third party rights were affected. Such persons should have the right to make representations and apply for any decisions to be reviewed within a specified period such as 10
days from any decision having been taken including the initial appointment of a conservator. Appropriate court procedures and facilities would have to be set up. The intervention powers of the conservator should also be specified. These may, for example, include suspending access to and payment on accounts for certain periods such up to three months. This would, in particular, prevent the effects of a bank run or assets being immediately withdrawn. This would require court consent. Appropriate termination provisions would have to be included. Termination would generally take place on the expiry of the initial period designated or such shorter period as the supervisory or insolvency agency or the court may specify. Appointment terms would be subject to extension on proper cause. On termination of the appointment, the conservator should be required to return control of all assets, books and records obtained and general management responsibility for the running of the bank. The conservator should also be required to produce a final report and accounting on the conduct of the conservatorship.
2. Administration
A separate administration procedure may also be provided for. This would be equivalent to the Chapter 11 operated in the US or the administration procedure under the Insolvency Act in the United Kingdom. The objective would be to allow the court to appoint an administrator to assume control over the affairs, business and property of the bank for a period to attempt to deal with any immediate financial difficulties and restore the profitability and stability of the institution. Administration is similar to the conservation although the purpose is to allow the bank to be able to continue in business for a period under legal protection from its creditors to attempt to restore its business profitability and sustainability. This overlaps with conservatorship although its specific objective is to protect the assets of the bank against damage or dissipation in the event that a financial difficulty has or is expected to materialise in early course. Conservatorship then focuses on asset protection while administration on business and financial restructuring although this will include a protective element. Conservatorship is also commenced by the supervisory or insolvency agency alone while administration may be petitioned by the company, its management or creditors as well as by the supervisory or insolvency agency.
Appropriate triggers would again have to be specified. These may, for example, include where the company is or is likely to become unable to pay its debts or the appointment would assist ensure the survival of the company either in whole or part as a going concern, a more advantageous realization of the company's assets would be effected rather than through a winding-up or any other formal insolvency petition has already been made. Petitions for an application may be made by the company or any of its directors or by one or more of the bank's creditors The effect of the application is to prevent any other petitions being made such as for the winding-up of the institution. This will then allow the bank to trade for an interim period under court protection against any separate filings for winding-up or bankruptcy. On the making of an administration order, any existing petitions for winding-up or the appointment of another receiver are cancelled. The administrator is given power to do all such things as may be necessary for the management of the affairs, business and property of the company and without prejudice to the generality of these will be given a number of express powers (s 14(1)(a) and (b) and Schedule 1). These include power to take possession of, collect and get in the property of the company and take such proceedings as may be expedient, power to sell or otherwise dispose of the property of the company by public auction or private contract, raise or borrow money and grant security, appoint solicitors, accountants or other professional parties, bring and defend actions or commence or terminate arbitration, take out insurance and use the company's seal as well as to any other acts and execute in the name and on behalf of the company any other deed, receipt or document. The protective effects of conservatorship and the restructuring effects of administration are both highly desirable. The inclusion of both functions should be considered with any new insolvency model. The alternative to providing for them through separate procedures would be to combine them. In such a case, the relevant triggers and appointment rules would be adjusted accordingly although this would not create any difficulties. The distinction would then not be between conservatorship and administration as such but whether the administration was being used principally for protective or restructuring purposes. Both of these objectives could nevertheless be carried within the use of the same procedure. All of the points made above with
regard to commencement, powers and duties, reporting and accounts and termination would be equally applicable.
3. Restructuring or Rehabilitation
A separate formal restructuring or rehabilitation procedure may also be provided for in any new or revised law. The objective would be to allow for a rehabilitation plan to be given effect. This would either operate as part of or in parallel with a financial (lender of last resort) support facility. The effect of providing for an express restructuring procedure would be to formalize the availability of such support. One option would be for the supervisory or insolvency agency (generally the CBRC) to be able to make recommendations for the restructuring of a bank to the PBC or the State Council The relevant restructuring program would then be subject to political or legislative support or confirmation. The advantage of this is that it would avoid reputational damage to the PBC or the CBRC, where either or both considered that a rescue was inappropriate for economic as opposed to political reasons. The availability of necessary funding would then be determined in accordance with the relevant provisions set out in the Law of the PBC. A further restructuring option would be for the assets of the bank to be transferred to a newly established bank set up for the purpose of assuming and managing those loans and other claims (referred to as a 'bridge' bank in the US).12 The transfer made by order of the court on the application of the supervisory or insolvency agency with power being conferred on the court under the insolvency law to allow this to be effected without requiring the consent of the shareholders or creditors of the bank. The transfer would be published by notice in the official gazette and take effect on the following day or a date otherwise specified in the notice. The transfer may also exceptionally be made by an administrative agency, provided that appropriate safeguards are provided and supporting judicial review possible.
12
See Joint Report on Bank Insolvency, Ch 5 ; and Basel Committee on Banking Supervision, Supervisory
Guidance on Dealing with Weak Banks (March 2002), Part II; and IMF, Orderly & Effective Insolvency Procedures (1999), Ch 2. INTERNATIONAL LAW INSTITUTE 215 15 DECEMBER 2003
Other rehabilitation options would include a simple asset (or liability) transfer subject to an appropriate discount or share transfer including a merger or acquisition (including a US 'purchase & assumption'). Each of these options could either be set out in the powers conferred on the supervisory or insolvency agency with regard to possible resolution options. The agency could then be given separate power to develop relevant supporting procedures internally. The alternative would be to include formal options within an express rehabilitation procedure set out in the insolvency law or regulation. Provided that the availability and possible use of each option is publicized, whichever conferment policy is followed (delegated power or express rehabilitation procedure), the practical effects should be the same.
4. Liquidation
Most insolvency laws provide for both a voluntary and mandatory liquidation procedure.13 (a) Voluntary Liquidation Voluntary liquidation allows the owners of a bank to apply for its dissolution. This may be affected once the trading position of the bank has otherwise become undesirable or otherwise threatened. Compulsory rather than voluntary liquidation will usually apply where the authorization or license of the bank has been revoked for some reason. The availability of a voluntary liquidation procedure must not be allowed to prejudice the interests of creditors of the bank, including existing depositors. Most laws will accordingly only allow a voluntary liquidation if the bank is solvent and capable of paying off all existing claims and liabilities. The application or petition for the liquidation must then be accompanied by appropriate documentation and accounts and other supporting evidence to the extent necessary. Subject to the relevant conditions being satisfied, a court should be given power to dissolve a bank on a voluntary basis. The supervisory or regulatory authority may nevertheless be given power to object on cause shown. In the event that any conditions are not satisfied or the
13
See generally Joint Report on Bank Insolvency, Ch 6. 216 15 DECEMBER 2003
interests of depositors or creditors or the public more generally may otherwise be threatened, the supervisory or insolvency agency should be given power to apply for an administrator to be appointed or for the mandatory liquidation of the bank under its direction as appropriate. (b) Compulsory Liquidation A mandatory or automatic liquidation procedure should also be provided for. This would generally allow the supervisory or regulatory agency to apply for a bank to be dissolved through the appointment of a liquidator. The liquidator could either be a member of the staff of the agency or an independent third party (usually a qualified accountant or solicitor specializing in insolvency matters). Relevant conditions of appointment would have to be specified. A compulsory liquidation could either be effected where the authorization or license of a bank has been revoked or on any of the more general grounds referred to above. These would include illiquidity, balance sheet and regulatory insolvency. Specific triggers could be adjusted to reflect the conditions used under either an administration or liquidation. The capital test could, for example, be set at 25% for an administrator being appointed or 50% for a liquidator. A more general discretionary public interest test may also be used such as threat to safety and soundness of the bank or otherwise just and equitable (UK).14 This would be subject to a separate petition for rehabilitation being made to support or rescue an individual bank such as where systemic concerns arise or the interests of depositors or the public may otherwise be affected. Appropriate provision should be included in the relevant law or regulation in connection with entitlement to petition or apply for a relevant order, court consent, appointment of a liquidator, representations and appeal, effect of the order, powers and duties of the liquidator, reports, records, payments and termination and accounting. Some of these would overlap with the supporting provisions adopted in connection with administrators although further provision
14
The Financial Services Authority [FSA] in the UK may apply for the compulsory winding up of a bank
where it is unable to pay its debts or where the court is of the opinion that it is just and equitable for the bank to be wound up. Financial Services and Markets Act 2000, s 367(3). Relevant factors to be considered in determining whether it should apply for an order are set out in Chapter 10 of the FSAs Enforcement manual which forms part of its Handbook of Rules and Guidance. INTERNATIONAL LAW INSTITUTE 217 15 DECEMBER 2003
would have to be included for asset realization, determination of qualifying claims, priority of claims, payments and any further rights of appeal. The general objective would be to give the liquidator sufficient powers to realize the residual assets of the bank and make all appropriate payments in accordance with the relevant priority rules set under the relevant law or regulation. The court would again have to be involved at key appointment, property adjustment, and termination stages. The objective would be to ensure full due process and legal certainty with ultimate finality of relevant proceedings. Appropriate immunities would also have to be conferred on the liquidator to ensure that there was no personal liability other than where action was taken in bad faith. Relevant priority rules could include: inland revenue or inland revenue service debts; customs and excise duty debts; social security contributions; occupational and other contribution schemes contribution; employee remunerations; other preferential creditors; depositors; other general creditors. More developed rules may also be included with regard to payments to central or regional authorities and possibly for court awards including, for example, personal injury claims. After all of these entitlements have been satisfied, subordinated debt holders would be paid with any residual amounts being paid to shareholders. Payments would again be made according to any relevant sub-priority rules set out in the relevant company law or articles or memorandum of the bank concerned. Separate provision may also be included for the court to give effect to creditor agreements or compromises including power to compel the operation of these on a minority where an appropriate distribution had been agreed by the others generally or within any particular category of creditor claims. Further provision should also be included for possible pre-insolvency offences by managers and third parties and for cross-border insolvency issues.
5. Bankruptcy
Some laws include provision for a separate bankruptcy procedure. The objective is to disapply the general law of bankruptcy and provide for specific third-party creditor rights against banks. Petitions may be made by any creditor of the bank and are determined on the basis of one of the general tests including liquidity, balance sheet and regulatory insolvency.
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The main difference between a compulsory liquidation and bankruptcy procedure where both are used is that liquidation will only be commenced by the supervisory or regulatory agency and for a regulatory failure including, in particular, authorization or license revocation. Bankruptcy is then a more general closure remedy available to all creditors of the bank. As the supervisory or regulatory agency may also be given power to apply for bankruptcy under the general test provided for, and as many of the supporting procedures for the appointment of a liquidator and conduct of the closure are identical, the two procedures may be combined. It would only be necessary to include separate rights of application or petition for the supervisory or insolvency agency and general creditors. These could be included within a new insolvency law for the PRC.
G. Support or Rescue Options In addition to determining whether the insolvency regime should operate on a court or extra-judicial basis and which specific resolution procedures should be made available (asset protection, administration or closure), possible support or rescue mechanisms must also be considered within the restructuring or rehabilitation options available.15 This will operate as an alternative to the possible provision of central bank funding on a general or emergency (lender of last resort) basis. The provision of such support will always be discretionary although this may either operate on a formal or informal basis. In the absence of established experience in the management and discharge of such functions, the creation of a more formal procedure would be advisable in that would clarify the number and functions of each of the parties involved. This could, for example, be effected under some form of early resolution procedure including a stability review to determine whether any such support should be provided. A separate 'regulatory hearing' or 'regulatory (or protective) receivership' may also be considered which would link the market support process with possible conservation and asset protection. These support procedures would apply at an early stage following confirmation that a bank was experiencing financial difficulty. In addition to these early procedures, other support or
15
See generally Joint Report on Bank Insolvency, Ch 5. 219 15 DECEMBER 2003
rescue operations should also be considered either immediately or at an stage in the resolution process. These may include further secured lending, capital injections or asset or share transfers. Each of these is considered further below:
1. Market Support
The central bank must initially decide whether it will or will not make any financial assistance support available. One way in which an initial decision could be taken with regard to the possible provision of financial support would be set up some type of stability review procedure. The objective of the review would be to place the central bank under an express statutory obligation to review the potential consequences and impact of the closure of a particular institution and then to determine whether some form of support should be provided. This may have to be cross-referred to statutory functions of the central bank as set out in relevant legislation. Such support would, of course, only be made available in the event of a systemic threat to the financial system and then only in accordance with the traditional rules developed (only support illiquid but solvent banks unless there is a larger systemic threat).
2. Restructuring or Rehabilitation (Regulatory Hearing or Regulatory Receivership)

As well as determine whether any financial support should be provided, it is necessary to confirm whether any other restructuring or rehabilitation options may be available. Supervisory staff would then have to meet with bank management to discuss possible proposals. One way in which this could be affected would be to set up a sort of regulatory hearing procedure with the line management within the CBRC meeting with senior bank management and the major shareholders (but only if they constituted a sufficiently accessible group) to discuss a possible restructuring, which may include capital or liquidity injection or change of management or takeover or merger (including an asset or share purchase. In the event that the owners are a large or diverse group or otherwise oppose the restructuring or asset or share sale proposed, which is otherwise considered desirable, the authorities should be able to apply to the court for an order to approve the rescue arrangements proposed. A court order would be necessary to the extent that company law, property and other
rights were otherwise being interfered with, without consent. The order would be approved where the relevant authorities were able to establish that the proposed arrangements were in the best interests of the bank or public interest more generally. Any person or persons who objected should be given a right to be heard; although, care would have to be taken to ensure that there was no abuse or undue delay. One option would be for the restructuring or rescue to be given effect to immediately on a provisional or interim basis subject to this being confirmed by the court at a later stage after all interested parties had been heard. In the event that it was considered that it was necessary for the assets of the bank to be protected in some way, the authorities should have the right to apply to the court for the immediate appointment of some form of regulatory receiver. This would be necessary, for example, to safeguard the assets of the bank from dissipation. This regulatory receiver would obviously overlap with a conservator or administrator. It would only then be necessary to confirm that the powers of the administrator extended to assisting or giving effect to an agreed restructuring or rehabilitation program.
3. Secured Lending and Capital Injections

The financial position of the bank may also be supported by third-party liquidity or capital injections. This may either be provided by existing shareholders or outside third parties or in exceptional cases by the central bank. The objective would be to strengthen the stability and credibility of the bank in the market place. It might generally not be possible to require existing shareholders or prospective new owners to inject capital except, possibly, where these were already SOEs. Commercial freedom would otherwise apply. To the extent that the PBC or the CBRC provided capital, they would effectively be partially nationalizing the bank. Additional funding may also be made available to a bank at any time. This would generally be on commercial terms with the advance being fully secured and an appropriate interest rate imposed.
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15 DECEMBER 2003
4. Asset and Liability Transfers

Asset transfers may either be affected by having the loan book of the bank assigned to an existing bank or to a newly established (bridge) bank. A combined asset and liability transfer is generally referred to as 'purchase & assumption' in the United States. The purchase of the loan book by an existing bank would be effected at some discount having regard to the quality of the underlying loans and the inability of the assignee to undertake the same original credit assessments. Once the assets have been transferred, the assignor would be wound up with the discount price being distributed to the outstanding creditors, including depositors and then shareholders. A newly established bank may also be set up to manage the loan book. The advantage would be that this would be able to operate without the credit or reputational damage suffered by the original bank, so long as appropriate, credible new management were appointed. The financial standing of the new bank could also be further strengthened through additional capital injections. The new bank may either be set up to operate on an interim basis pending the further transfer or closure of the loan book or with a view to continuing on a general basis.
5. Share Transfers
Rather than transfer assets, the shares of the bank may be transferred through a merger or acquisition. This may either be effected by a third-party enterprise or a SOE. Whether this is another financial institution would depend upon the holding company or other qualifying holding rules adopted.16
H. Supporting Statutory Provisions The draft laws or regulations to be adopted will have to include a number of additional substantive and procedural provisions. A number of points have already been made in this regard under each of the resolution option that may be set up. These would include the triggers for each insolvency mechanism to be adopted as well as appointment rules. The effects of the appointment should also have to be specified with the
16
See Joint Report on Bank Insolvency, para 5.4. 222 15 DECEMBER 2003
duties and powers of the appointees (conservator, administrator and liquidator). Report, record and review requirements will also have to be specified with the appropriate court consent stages being determined. Termination provisions will also be included for each resolution mechanism. In addition to these specific mechanism related provisions, additional measures should also be included with regard to distribution priorities, appeals, hearings, party immunities and final procedural closure or resolution. Appropriate provisions will have to be included within the draft law or regulations in respect of each. The recommendations in Appendix G address each of these in turn.
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15 DECEMBER 2003
IX.
CONCLUSION This report grew out of the PRCs plans for many changes in its financial sector and it has attempted to address the most urgent needs for improvements there. A revision of the Commercial Banking Law has, initially, been required as a result of the CBRC taking on primary responsibility for bank regulation and supervision. That has been implemented, along with a revised PBC Law and a new Law on Banking Supervision, since this reports cut-off date. This on-going process of revision also presents the opportunity to replace numerous out-dated rules and regulations and to integrate others. This can be done in a way that both comports with the PRCs WTO commitments and fits well with new laws on financial insolvency, financial-group regulation and anti-money laundering standards. This report and its appendices outline a range of changes that should be included in any such revisions, primarily in the sections on Legal Framework (Section II and Appendix A) and WTO Commitments (Section III and Appendix B). The central themes of these are:
accountability, predictability, consistency and transparency. Judicious adherence to them can encourage both growth and rapid adjustment by linking market forces with government oversight. Implementing these changes is likely to lead to an initial proliferation of banks and innovation in financial services, as new entrants respond to rationalized licensing and capital requirements. This expansion of bank assets is likely to be followed by a period of consolidation, as some financial institutions fail to adapt to increased competition and customer-service obligations. This cycle is normal in the re-regulation of any industry. The PRCs success in managing that consolidation will depend on the rigor and efficiency of its supervisory functions and on smooth coordination among the four financial regulators. The sections on Bank Restructuring (Section VIII and Appendices G & H) and on Financial Groups (Section VII and Appendix F) address the changes required for this to develop. There are lessons to draw from how the USA, Japan and other markets have responded over the last fifteen years, each in their own way, to such changes and in how the EU is now doing.
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Banking Laws and Regulations

TA: PRC 3890
Appendices
to the
Final Report
December 2003
prepared by
INTERNATIONAL LAW INSITUTE

1055 Thomas Jefferson Street, NW Washington, D.C. 20007 www.ili.org
APPENDICES
APPENDICES
A. Legal Framework tables of international comparisons 1. Table 1 Chinas Financial System, 2002 2. Table 2 Core Principles Compliance 3. Table 3 Regulatory & Supervisory Structure, Scope, Independence & Accountability 4. Table 4 Entry Into Banking 5. Table 5 Ownership Structure 6. Table 6 Scope of Activities 7. Table 7 Capital Requirements 8. Table 8 External Auditing Requirements & Examinations 9. Table 9 Liquidity & Diversification Requirements 10. Table 10 Provisioning Requirements 11. Table 11 Accounting & Information Disclosure Requirements 12. Table 12 Discipline and Problem Institutions Insolvency 13. Table 13 Deposit Insurance Schemes 14. Table 14 Risk Concentrations B. WTO Commitments tables of international comparisons 1. 2. 3. 4. 5. 1 1 2 3 8 11 16 24 28 30 34 38 42 49 53 54
Table 1 Capital Requirements in Various Countries 54 Table 2 Measures that appear to treat foreign financial institutions less favorably 56 Table 3 Endowment Capital Requirements for Branches of Foreign Banking Organizations Table 4 Asset Pledge Requirements for Branches of Foreign Banking Organizations 60 Table 5 Industrial-Firm Investment in Banks 60 62
C. Credit Information Bureaus table of international comparisons 1Must Register with the Government 2Restrictions on Entry into Market 3Legal Restrictions that Discourage Private Credit Bureaus from Forming 4Bureau Coverage of Individuals or Firms 5Ownership of Credit Bureaus 6Type of Information Shared with Users D. Anti-Money Laundering table of international comparisons (international standards, key elements of law, international country comparisons) E. Anti-Money Laundering detailed comments on three Rules of March 2003
INTERNATIONAL LAW INSTITUTE i FINAL REPORT - 15 DECEMBER 2003
63
73
APPENDICES
F. Financial Conglomerates supporting discussion and comparisons (no Chinese version) 93 1. 2. 3. 4. 5. 6. 7. 8. Financial Laws in China Joint Forum on Financial Conglomerates International Comparison of Financial Conglomerate Laws International Comparison of Inter-Agency Cooperation Organizational Structure of the Joint Committee EU Financial Conglomerates Advantages and Disadvantages of Single Regulators in Institutional Reform UK Financial Services and Markets 93 103 122 173 193 194 201 202 207 207 217 227 227 227 228 229 229 232 234 235 237 245 249 266 273 276 283 285 287
G. Bank Insolvency supporting discussion and comparisons (no Chinese version) 1. Insolvency Laws in the PRC 2. Principles for Effective Insolvency and Creditor Rights Systems World Bank H. Bank Insolvency table of international comparisons 1. To what extent is the banking supervisor responsible for the insolvency procedure, to what extent is the procedure managed by a bankruptcy court 2. What mechanisms are there for inter-agency and court coordination 3. To what extent is bank insolvency governed by a special law or the general bankruptcy or insolvency law 4. Explain the extent to which any pre-insolvency supervisory intervention is available 5. Explain the extent to which any reconstruction or reorganization measures exist 6. Explain the extent to which any financial assistance is available especially through capital injections into unsound financial institutions I. Summary of ten reference markets treatment of central bank law I. II. III. IV. V. VI. VII. VIII. IX X. Objectives Functions Monetary Operations Independence Organization Lender of last resort Accountability and Transparency Relations with other institutions Supervisory Responsibilities Finance and accounting
ii
FINAL REPORT - 15 DECEMBER 2003
APPENDIX A LEGAL FRAMEWORK INTL COMPARISONS
Appendices to the Final Report

The following six appendices contain supporting tables with statistical detail or supporting rationale for discussion and recommendations made in the body of the main report. It should be viewed as a companion piece to that volume.
A. Legal Framework
14 COMPARATIVE TABLES BANKING SYSTEM STANDARDS
(PAGES 1-53)
Table 1 Chinas Financial System: 2002

Commercial Banks Four State-Owned Banks Other CBs Urban Credit Co-ops Rural Credit Co-ops Total Memo: Foreign Banks Assets (RMB 100 million) 135,496 29,977 1,192 22,052 188,717 3,242 Household Deposits (RMB 100 million) 56,655 4,347 550 15,406 16,958 N/A Profits (RMB 100 million) 30,620 N/A N/A N/A N/A 15 Non-performing Loans (%) 21.41 N/A N/A N/A N/A 6.19
Source: Peoples Bank of China, 2002 Annual Report.
Stock Market Shanghai Shenzheng Total Bonds Outstanding
Market Value Capitalization (RMB 100 million) 25,364 12,965 38,329
Total Value (RMB 100 million) Government 19,079 Corporate Nil Source: Peoples Bank of China, 2002 Annual Report.
Table 2 Core Principles of Compliance (In percentages of 60 countries assessed)

Compliant 1. Framework for supervisory authority 1.1. Objectives 1.2. Independence 1.3. Legal framework 1.4. Enforcement powers 1.5. Legal protection 1.6. Information sharing 2. Permissible activities 3. Licensing criteria 4. Ownership 5. Investment criteria 6. Capital adequacy 7. Credit policies 8. Loan evaluation 9. Large exposures 10. Connected lending 11. Country risk 12. Market risks 13. Other risks 14. Internal control 15. Money laundering 16. On-site and off-site supervision 17. Bank management 18. Off-site supervision 19. Validation of information 20. Consolidated supervision 21. Accounting 22. Remedial measures 23. Global consolidation 24. Host country supervision 25. Supervision of foreign establishments 63 30 63 52 46 40 63 38 52 28 28 37 25 32 28 23 23 17 32 28 42 48 35 47 23 35 23 25 32 43 24 30 27 28 13 28 30 47 21 45 37 23 46 43 30 10 29 38 36 22 38 39 35 33 12 42 35 17 22 27 13 37 7 18 17 25 5 12 17 22 33 38 27 22 32 10 35 27 22 20 18 10 28 20 30 20 40 18 18 23 0 3 3 2 22 7 2 3 10 5 2 2 2 3 10 35 13 18 10 30 2 3 2 0 23 3 2 12 8 5 0 0 0 0 2 0 0 0 0 0 0 0 0 0 0 22 0 0 0 0 0 0 0 0 12 0 0 28 20 2 Largely compliant Materially noncompliant Noncompliant Not applicable
Source: International Monetary Fund and World Bank, Implementation of the Basel Core Principles for Effective Banking Supervision, Experiences, Influences, and Perspectives, September 23, 2002.
Table 3 Regulatory and Supervisory Structure, Scope, Independence and Accountability

Is there more than one body/agency that grants licenses to banks? Is there more than one supervisory body? Not clear (Waiting for the new Central Bank Law) Is there a single financial supervisory agency for the financial sector?
Question
What body/agency grants commercial banking licenses?
What body/agency supervises banks?
PRC
China Banking Regulatory Commission
No
CBRC
No
Australia
Australian Prudential Regulation Authority (APRA). All the references to banks have been changed to authorized deposit-taking institutions or ADIs under the new regulatory framework. There is no formal definition provided in the Banking Act 1959 for the term commercial banks. In accordance with the Banking Act, commercial banks can be informally defined as a body corporate with an authority under the Act to carry on banking business in Australia and (to use the word bank) must have at least A$50 million in Tier 1 capital or be branches of foreign banks. Department of Finance The Committee of the Credit Institutions and the Companies of Investment (CECEI) Federal Financial Supervisory Authority (BaFin)
No
APRA is the prudential regulator of banks (ADIs) operating in Australia. In addition to APRAs prudential supervision, all banks (which must be a body corporate under the Banking Act) are also subject to the Corporations Law administered and enforced by the Australian Securities and Investments Commission (ASIC).
No
No
Canada
No
OSFI The Commission Bancaire BaFin - assisted by the Deutsche Bundesbank
No
No
France
No
No
No
Germany
No
Yes
Yes
Hong Kong, China
The Monetary Authority
No
The Monetary Authority
No
No
India
Reserve Bank of India (RBI)
No
Board for Financial Supervision (BFS) under the aegis of Reserve Bank of India. The BFS is accountable to the Central Board of RBI. RBI in turn is accountable to the Parliament.
No
No
Italy
The Bank of Italy
No
The Bank of Italy
No
No
Table 3 Regulatory and Supervisory Structure, Scope, Independence and Accountability

Is there more than one body/agency that grants licenses to banks? Is there more than one supervisory body? Is there a single financial supervisory agency for the financial sector?
Question
What body/agency grants commercial banking licenses?
What body/agency supervises banks?
Japan
Financial Services Agency (FSA)
No
Financial Services Agency (FSA)
No
Yes (The FSA is unitary supervisor for banks, securities and insurance sector.)
Norway
Ministry of Finance by advice from Kredittilsynet (The Banking Insurance and Securities Commission of Norway)
No
Kredittilsynet(The Banking Insurance and Securities Commission of Norway)
No
Yes
Philippines
The Bangko Sentral ng Pilipinas
No
The Bangko Sentral ng Pilipinas
No
No
Russia
The Central Bank of the Russian Federation (Bank of Russia)
No
Bank of Russia
No
No
South Africa
South African Reserve Bank
No
South African Reserve Bank Financial Supervisory Commission / Financial Supervisory Service
No
No
South Korea
Financial Supervisory Commission
No
Yes
Yes
Switzerland
Swiss Federal Banking Commission (SFBC)
No
Swiss Federal Banking Commission (SFBC)
No
No
Taipei, China
Bureau of Monetary Affairs, Ministry of Finance
Central Bank, Ministry of Finance, Central Deposit Insurance Corporation
Yes
United Kingdom
Financial Services Authority
No
FSA
No
Yes
United States
Office of the Comptroller of the Currency and state banking authorities
Yes
Office of the Comptroller of the Currency, Federal Reserve, Federal Deposit Insurance Corporation, state banking authorities
Yes
No
Table 3 (Cont) Regulatory and Supervisory Structure, Scope, Independence and Accountability
To whom are the supervisory bodies responsible or accountable? How is the head of the supervisory agency (and other directors) appointed? Does the head of the supervisory agency (and other directors) have a fixed term? Are supervisors legally liable for their actions (e.g., if a supervisor takes action against a bank can he/she be sued)? No
Question
The head of the supervisory agency can be removed by:
PRC
State Council A legislative body, such as Parliament or Congress The Finance Minister or other cabinet level official
State Council The decision of the Finance Minister or other cabinet level authority The decision of the Finance Minister or other cabinet level authority The decision of the head of government (e.g. President, Prime Minister) The decision of the head of government (e.g., President, Prime Minister) Financial Secretary of the Hong Kong Special Administrative Government The decision of the head of government (e.g., President, Prime Minister)
No
State Council The decision of the Finance Minister or other cabinet level authority The decision of the Finance Minister or other cabinet level authority
Australia
Yes(5 years)
No
Canada
Yes (7 years)
No
France
Other
Yes (6 years)
Other
Yes
Germany
The Finance Minister or other cabinet level official The Financial Secretary of the HKSARG
No
The decision of the head of government (e.g., President, Prime Minister) The Financial Secretary of the HKSARG
No
Hong Kong, China
No
No
India
A legislative body, such as Parliament or Congress
No
The decision of the head of government (e.g., President, Prime Minister) The Governor of the Bank of Italy can be removed only with a resolution of the Bank of Italys Executive Board and with the agreement of the President of the Republic and the Prime Minister.
No
Italy
Measures adopted by the Bank of Italy can be appealed against in administrative courts .
The Governor of the Bank of Italy is appointed with a resolution of the Bank of Italys Executive Board, with the agreement of the President of the Republic and the Prime Minister.
No
Yes
To whom are the supervisory bodies responsible or accountable? How is the head of the supervisory agency (and other directors) appointed? Does the head of the supervisory agency (and other directors) have a fixed term? Are supervisors legally liable for their actions (e.g., if a supervisor takes action against a bank can he/she be sued)?
Question
Japan
The decision of the head of government (e.g., President, Prime Minister) for the Commissioner of the FSA. Other directors are appointed by the Commissioner.
No
The decision of the head of government (e.g., President, Prime Minister) . However, the National Civil Servant Law states Absent justification stipulated under controlling law or the rules and regulations of the National Personnel Authority, staff shall not be demoted, forced to take a leave of absence, or dismissed from service." The decision of the head of government (e.g., President, Prime Minister) The decision of the head of government (e.g., President, Prime Minister) A simple majority of a legislative body (Parliament or Congress)
No
Norway
The Finance Minister or other cabinet level official
The decision of the head of government (e.g., President, Prime Minister) The decision of the head of government (e.g., President, Prime Minister)
Yes (6 years with the possibility of one reappointment)
No
Philippines
Yes (six years)
Yes
Russia
A simple majority of a legislative body (Parliament or Congress)
Yes,4 years. (The same person can not be the Chairman of the Bank of Russia more than 3 terms)
Yes
South Africa
The decision of the Finance Minister or other cabinet level official
No
Yes; appointment as General Manager by the SA Reserve Bank with approval of the Minister of Finance. Removal by the SA Reserve Bank in consultation with the Minister of Finance A simple majority of a legislative body (Parliament or Congress), a supermajority (e.g., 60%, 75%) of a legislative body and other
No
South Korea
The decision of the head of government (e.g., President, Prime Minister)
Yes (3 years)
Yes
To whom are the supervisory bodies responsible or accountable? How is the head of the supervisory agency (and other directors) appointed? Does the head of the supervisory agency (and other directors) have a fixed term? Are supervisors legally liable for their actions (e.g., if a supervisor takes action against a bank can he/she be sued)?
Question
Switzerland
The decision of the head of government (e.g., President, Prime Minister) The decision of the head of government (e.g., President, Prime Minister) The decision of the Finance Minister or other cabinet level authority. Appointment is formally by Her Majesty's Treasury The decision of the head of government (e.g., President, Prime Minister)
Yes (4 years)
The decision of the head of government (e.g., President, Prime Minister) The decision of the head of government (e.g., President, Prime Minister)
No
Taipei, China
The Prime Minister
No
United Kingdom
The Finance Minister or other cabinet level official
No, UK law does not require the head (or other directors) to be appointed for a fixed term, but to date such has been the practice
The decision of the Finance Minister or other cabinet level authority and other.
No
United States
The President, the Congress, the Treasury Department(OCC), and state governments
Yes, five years(OCC)
The decision of the head of government (e.g., President, Prime Minister) and other.
No
Table 4 Entry Into Banking

What is the minimum capital entry requirement? (in US$ and/or domestic currency, state which) Yuan 1000m,100m,50m for commercial banks ,city commercial banks and rural commercial banks, respectively. A $50 million Tier 1 capital for locally incorporated ADIs (whether these be Australian/foreign owned) which intend to use the word bank in their company / trading names or to describe, advertise, etc their business; this requirement is inapplicable to foreign bank branches. $5 million CND 5 MEUR 5 Mio HK$300 mn Is this minimum capital entry requirement the same for a foreign branch and subsidiary? Is it legally required that applicants submit information on the source of funds to be used as capital? Can the initial disbursement or subsequent injections of capital be done with assets other than cash or government securities? Can initial disbursement of capital be done with borrowed funds?
Question
Are the sources of funds to be used as capital verified by the regulatory/supervisory authorities?
PRC
No
Yes
Yes
No, only cash
No
Australia
No
Yes
Yes
Yes
Yes
Canada France Germany Hong Kong, China
Yes Yes Yes Yes No; A foreign bank desirous of opening branches in India is required to bring in assigned minimum capital of US $ 25 million, of which US$ 10 million shall be brought in at the time of opening each of the first two branches and the balance of US$ 5 million at the time of opening the third or more branches.
Yes Yes No No
Yes Yes No Yes
Yes Yes Yes Yes
No Yes No Yes
India
In domestic currency for Indian banks, Rs.200 crore which is required to be raised to Rs.300 crore, within the next three years
Yes
Yes
No
No
Table 4 Entry Into Banking

What is the minimum capital entry requirement? (in US$ and/or domestic currency, state which) The minimum capital entry requirement (for the granting of banking licenses) amounts to Euro 6.3 million for banks established as limited companies and banche popolari, and Euro 2 million for mutual banks. 2 billion Yen EUR 5 mill/NOK 395 mill UBs-P4.950;KBsP2.400 Is this minimum capital entry requirement the same for a foreign branch and subsidiary? Is it legally required that applicants submit information on the source of funds to be used as capital? Can the initial disbursement or subsequent injections of capital be done with assets other than cash or government securities? Can initial disbursement of capital be done with borrowed funds?
Question
Are the sources of funds to be used as capital verified by the regulatory/supervisory authorities?
Italy
Yes for non EU subsidiaries and branches.
Yes
Yes
Yes
No
Japan Norway Philippines
Yes for subsidiary No for branch No Yes
Yes Yes No
Yes Yes Yes
No No Yes Yes; buildings; disbursement or subsequent injections of capital can not be done in government securities. Yes Yes Yes Yes Yes No
Yes No Yes
Russia
5 million EUR
Yes; Branches of foreign banks are not currently allowed
Yes
Yes
No
South Africa South Korea Switzerland Taipei, China United Kingdom United States
ZAR250million 100,000,000,000 won CHF 10 mio. NT$10000 5 million Amount set by individual states
Yes No Yes N/A Yes Yes
No Yes Yes Yes Yes Yes
Yes Yes Yes Yes Yes Yes
No No No Yes Yes Yes
Table 4 (Cont) Entry Into Banking

Which of the following are legally required to be submitted before issuance of the banking license? Sources of funds to be disbursed in the capitalization of new bank? Yes Yes Yes Yes
Question
Draft bylaws?
Intended organization chart?
Financial projections for first three years?
Financial information on main potential shareholders?
Background /experience of future directors?
Background /experience of future managers?
Market differentiation intended for the new bank?
PRC Australia Canada France
Yes Yes Yes Yes
Yes Yes Yes Yes
Yes Yes Yes Yes
Yes Yes Yes Yes Yes; as far as they prepare annual accounts Yes Yes Yes Yes Yes Yes
Yes Yes Yes Yes
Yes Yes Yes No
No Yes Yes No
Germany
Yes
Yes
Yes
Yes
No
Hong Kong, China India Italy Japan Norway Philippines
Yes No Yes Yes Yes Yes Yes; financial projections for first two years Yes Yes Yes Yes Yes Yes
No No Yes No Yes Yes
Russia
Yes
Yes
Yes
Yes
Yes
Yes
No; banks are universal
10
Table 5 Ownership Structure

Is there a maximum percentage of bank capital that can be owned by a single owner? If yes, what are the maximum percentages associated with the total ownership by a related party group (e.g., family, business associates, etc.)? Can nonfinancial firms own voting shares in commercial banks? If any shares can be owned by nonfinancial firms, what are the limits? Can non-bank financial firms (e.g., insurance companies, finance companies, etc.) own commercial banks? Non-bank financial firms may own 100% of the equity in a commercial bank; but prior authorization or approval is required. But Insurance company is prohibited Non-bank financial firms may own 100% of the equity in a commercial bank; but prior authorization or approval is required Limits are placed on ownership of banks by nonfinancial firms, such as maximum percentage of a commercial bank's capital or shares Non-bank financial firms may own 100% of the equity in a commercial bank; but prior authorization or approval is required
Question
If yes, what is the percentage?
Can related parties own capital in a bank?
Are there penalties for violating this rule?
PRC
No
10%, more than 10% requires prior approval.
Yes
10%,more than 10% requires prior approval.
Yes
Yes
Non-financial firm may own 100% of the equity in a commercial bank; but prior authorization or approval is required Non-financial firm may own 100% of the equity in a commercial bank; but prior authorization or approval is required Limits are placed on ownership; such as maximum percentage of a commercial bank's capital or shares
Australia
Yes
15%
Yes
15%
Yes
Yes
Canada
Yes
20% voting / 30% non-voting - note there are no limits on banks with less than $5 billion in assets
Yes
100%
N/A
Yes
France
No
Not applicable
Yes
100%
N/A
Yes
11

Is there a maximum percentage of bank capital that can be owned by a single owner? If yes, what are the maximum percentages associated with the total ownership by a related party group (e.g., family, business associates, etc.)? Can nonfinancial firms own voting shares in commercial banks? If any shares can be owned by nonfinancial firms, what are the limits? Non-financial firm may own 100% of the equity in a commercial bank; but prior authorization or approval is required Limits are placed on ownership; such as maximum percentage of a commercial bank's capital or shares Can non-bank financial firms (e.g., insurance companies, finance companies, etc.) own commercial banks?
Question
Germany
No
Not applicable
Yes
100%
N/A
Yes
Non-bank financial firms may own 100% of the equity in a commercial bank; but prior authorization or approval is required
Hong Kong, China
No
Not applicable
Yes
100%
N/A
Yes
India
Yes
At present, maximum voting right for individual holder is restricted to 10% of total capital of a bank. But Govt. of India is planning to amend the law to increase/ remove the ceiling.
Yes
At present, maximum voting right for individual holder is restricted to 10% of total capital of a bank. But Govt. of India is planning to amend the law to increase/ remove the ceiling. Acknowledgement from RBI is required before effecting transfer of shares when the transfer makes a shareholding of the individual/group equivalent to five percent of the total paid-up capital of the bank.
Yes
Yes
Limits are placed on ownership; such as maximum percentage of a commercial bank's capital or shares
If more than five per cent of the total paidup capital of the bank, non-bank financial institutions are allowed to float banks with 100% equity contribution to begin with. However, the holding must be lowered to 40% over one year.
12

Is there a maximum percentage of bank capital that can be owned by a single owner? If yes, what are the maximum percentages associated with the total ownership by a related party group (e.g., family, business associates, etc.)? Can nonfinancial firms own voting shares in commercial banks? If any shares can be owned by nonfinancial firms, what are the limits? Limits are placed on ownership; such as maximum percentage of a commercial bank's capital or shares Non-financial firm may own 100% of the equity in a commercial bank; but prior authorization or approval is required Limits are placed on ownership; such as maximum percentage of a commercial bank's capital or shares Limits are placed on ownership; such as maximum percentage of a commercial bank's capital or shares Can non-bank financial firms (e.g., insurance companies, finance companies, etc.) own commercial banks? Non-bank financial firms may own 100% of the equity in a commercial bank; but prior authorization or approval is required Non-bank financial firms may own 100% of the equity in a commercial bank; but prior authorization or approval is required Non-bank financial firms may own 100% of the equity in a commercial bank; but prior authorization or approval is required Limits are placed on ownership of banks by nonfinancial firms, such as maximum percentage of a commercial bank's capital or shares
Question
Italy
No
N/A
Yes
100%
N/A
Yes
Japan
No
N/A
Yes
100%
N/A
Yes
Norway
Yes
10%
Yes
10%
Yes
Yes
Philippines
Yes
40%
Yes
100%
N/A
Yes
13

Is there a maximum percentage of bank capital that can be owned by a single owner? If yes, what are the maximum percentages associated with the total ownership by a related party group (e.g., family, business associates, etc.)? Can nonfinancial firms own voting shares in commercial banks? If any shares can be owned by nonfinancial firms, what are the limits? Can non-bank financial firms (e.g., insurance companies, finance companies, etc.) own commercial banks?
Question
Russia
No
N/A
Yes
100 %, (but participation (share) more than 20 per cent should be previously agreed with the Bank of Russia.)
Yes
Yes
Non-financial firm may own 100% of the equity in a commercial bank; but prior authorization or approval is required
Non-bank financial firms may own 100% of the equity in a commercial bank; but prior authorization or approval is required(>20%)
South Africa
No
N/A
Yes
15%, then with Registrar of Banks approval after one year increased to 24%, after another year increased to 49% then after one year with Minister of Finance's approval up to 74%, after another year up to >74% (subject to Competition Board)
Yes
Yes
Non-financial firm may own 100% of the equity in a commercial bank; but prior authorization or approval is required Non-financial firm may own 100% of the equity in a commercial bank; but prior authorization or approval is required
Non-financial firm may own 100% of the equity in a commercial bank
South Korea
No
N/A
Yes
10%
Yes
Yes
14

Is there a maximum percentage of bank capital that can be owned by a single owner? If yes, what are the maximum percentages associated with the total ownership by a related party group (e.g., family, business associates, etc.)? Can nonfinancial firms own voting shares in commercial banks? If any shares can be owned by nonfinancial firms, what are the limits? Can non-bank financial firms (e.g., insurance companies, finance companies, etc.) own commercial banks? Non-financial firm may own 100% of the equity in a commercial bank Limits are placed on ownership of banks by nonfinancial firms, such as maximum percentage of a commercial bank's capital or shares(5%) Non-bank financial firms may own 100% of the equity in a commercial bank Non-bank financial firms may own 100% of the equity in a commercial bank; but prior authorization or approval is required, and it must be done through a financial holding company.
Question
Switzerland
No
N/A
Yes
100%
N/A
Yes
Non-financial firm may own 100% of the equity in a commercial bank Limits are placed on ownership; such as maximum percentage of a commercial bank's capital or shares Non-financial firm may own 100% of the equity in a commercial bank Limits are placed on ownership; such as maximum percentage of a commercial bank's capital or shares
Taipei, China
Yes
5%
Yes
15%
N/A
Yes
United Kingdom
No
At least two individuals are required to look over the business of the bank
Yes
100%
N/A
Yes
United States
No
N/A
Yes
100%
N/A
Yes
15
Table 6 Scope of Activities

Is more than one license required (e.g., one for each banking activity, such as commercial banking, securities operations, insurance, etc.)? What kinds of securities activities can banks engage in? What are the conditions under which banks can engage in these activities?
Question
Underwriting?
Dealing and brokering?
Mutual fund activities?
PRC
Yes
No, except government bonds
No,, except government bonds
No
Less than the full range of activities can be conducted in banks or subsidiaries A full range of these activities are offered but all or some of these activities must be conducted in subsidiaries Less than the full range of activities can be conducted in banks or subsidiaries
Australia
Yes
Yes
Yes
No
Canada
No
Yes
Yes
Yes
France
No
Yes
Yes
Yes
A full range of these activities can be conducted directly in banks
Germany
Yes
Yes
Yes
No
Hong Kong, China
No
Yes
Yes
Yes
A full range of these activities can be conducted directly in banks A full range of these activities are offered but all or some of these activities must be conducted in subsidiaries
India
Yes
Yes
Yes
Yes
Italy
Yes (one for banking and one for securities operations)
Yes
Yes
Yes
A full range of these activities can be conducted directly in banks; except for mutual fund activities.
Japan
No
Yes
Yes
Yes
A full range of these activities are offered but all or some of these activities must be conducted in subsidiaries
Norway
Yes
Yes
Yes
Yes
16
Table 6 Scope of Activities

Is more than one license required (e.g., one for each banking activity, such as commercial banking, securities operations, insurance, etc.)? What kinds of securities activities can banks engage in? What are the conditions under which banks can engage in these activities?
Question
Underwriting?
Dealing and brokering?
Mutual fund activities?
Philippines
Yes
Yes
Yes
Yes
Russia
Yes; The Russian Legislation does not allow credit institutions to exercise insurance activity
Yes; The legislation of the Russian Federation does not define underwriting as a separate kind of professional activity in the securities market, but proceeding from the essence of the specified activity its realization requires the license for professional activity (brokering, dealing, etc.) in the securities market.
Yes; a special license
Yes; general funds of bank management
South Africa
Yes
Yes
Yes
Yes
A full range of these activities are offered but all or some of these activities must be conducted in subsidiaries A full range of these activities are offered but all or some of these activities must be conducted in subsidiaries A full range of these activities can be conducted directly in banks
South Korea
Yes
No
No
No
Switzerland
Yes
Yes
Yes
Yes
Taipei, China No
Yes
Yes
Yes A full range of these activities can be conducted directly in banks A full range of these activities are offered but all or some of these activities must be conducted in subsidiaries of FHC's
United Kingdom
Yes
Yes
Yes
United States
Yes
Yes
Yes
Yes
17
Table 6 (Cont) Scope of Activities

What kinds of insurance activities can banks engage in? Question Underwriting Selling What are the conditions under which banks can engage in these activities?
PRC
No
Yes
No, except as an agency of insurance activities
Australia
No
Yes
Canada
Yes
Yes
Less than the full range of activities can be conducted in banks or subsidiaries
France
No
Yes
Germany
No
Yes
A full range of these activities can be conducted directly in banks A full range of these activities are offered but all or some of these activities must be conducted in subsidiaries A full range of these activities are offered but all or some of these activities must be conducted in subsidiaries A full range of these activities can be conducted directly in banks
Hong Kong, China
Yes
Yes
India
No
Yes
Italy
No
Yes
Japan
Yes
Yes (this activity can be conducted by the insurance subsidiary of banks. There are some restrictions on the scope of the activity when conducted by banks themselves.)
Norway
Yes
Yes
A full range of these activities are offered but all or some of these activities must be conducted in subsidiaries Less than the full range of activities can be conducted in banks or subsidiaries N/A
Philippines
Yes
Yes
Russia
No
No
18

What kinds of insurance activities can banks engage in? Question Underwriting Selling What are the conditions under which banks can engage in these activities?
South Africa
Yes
Yes
South Korea
No
Yes
Switzerland Taipei, China
No No
Yes No
Less than the full range of activities can be conducted in banks or subsidiaries N/A A full range of these activities are offered but all or some of these activities must be conducted in subsidiaries
United Kingdom
Yes
Yes
United States
Yes
Yes
A full range of these activities are offered but all or some of these activities must be conducted in subsidiaries of FHC's
19

What kinds of real estate activities can banks engage in? Question Real estate investment? Real estate development? Real estate management? What are the conditions under which banks can engage in these activities? Can banks own shares in nonfinancial firms? If yes, what are the limits:
PRC
No
No
No
N/A
No
N/A
Australia
No
No
No
None of these activities can be done in either banks or subsidiaries A full range of these activities can be conducted directly in banks A full range of these activities can be conducted directly in banks A full range of these activities can be conducted directly in banks A full range of these activities can be conducted directly in banks None of these activities can be done in either banks or subsidiaries
Yes
A bank may own 100% of the equity in a nonfinancial firm but ownership is limited based upon a bank's equity capital A bank may own 100% of the equity in a nonfinancial firm but ownership is limited based upon a bank's equity capital A bank may own 100% of the equity in a nonfinancial firm but ownership is limited based upon a bank's equity capital A bank may own 100% of the equity in a nonfinancial firm but ownership is limited based upon a bank's equity capital A bank may own 100% of the equity in a nonfinancial firm but ownership is limited based upon a bank's equity capital
Canada
Yes
Yes
Yes
Yes
France
Yes
Yes
Yes
Yes
Germany
Yes
Yes
Yes
Yes
Hong Kong, China
Yes
Yes
Yes
Yes
India
No
No
No
Yes
A bank can only acquire less than 100% of the equity in a nonfinancial firm
20

Italy
No
No
No
N/A
Yes
There are two different limits related to banks capital: 3 per cent for holdings in one single nonfinancial firm (or in a non financial group); 15 % for holdings in non financial entities considered as a whole. Under certain conditions banks with a minimum capital of at least 1 billion euro are subject to less stringent limits.
Japan
No
No
No
None of these activities can be done in either banks or subsidiaries
Yes
Norway
Yes
Yes
Yes
A full range of these activities can be conducted directly in banks Less than the full range of activities can be conducted in banks or subsidiaries
Yes
A bank may own 100% of the equity in a nonfinancial firm but ownership is limited based upon a bank's equity capital A bank may own 100% of the equity in a nonfinancial firm but ownership is limited based upon a bank's equity capital
Philippines
Yes
Yes
Yes
Yes
21

Russia
No
No
No
N/A
Yes
Yes; Subsidiary and depending ownership are deducted from the banks capital. Besides that in accordance with the Russian regulation there is the indicator of the use of the banks own resources (capital) for the acquisition of shares of other legal entities (the maximum admissible value is set at 25%), which is established as a percentage ratio of the banks investment in the shares acquired for investment purposes as well as a part of the banks investment in the shares acquired for the purpose of re-sale to the banks own resources (capital). Bank may also make investment (not more than 5% of the banks capital) in the acquisition of shares of a single legal entity). A bank may own 100% of the equity in a nonfinancial firm but ownership is limited based upon a bank's equity capital
South Africa
Yes
No
No
A full range of these activities are offered but all or some of these activities must be conducted in subsidiaries None of these activities can be done in either banks or subsidiaries A full range of these activities can be conducted directly in banks
Yes
South Korea
No
No
No
Yes
Switzerland
Yes
Yes
Yes
Yes
A bank may own 100% of the equity in a nonfinancial firm but ownership is limited based upon a bank's equity capital
Taipei, China
No
No
No
Yes
22

United Kingdom
Yes
Yes
Yes
Yes
A bank may own 100% of the equity in any nonfinancial firm
United States
No (other than bank premises and through debts previously contracted)
No
No
None of these activities can be done in either banks or subsidiaries
No
A bank can only acquire less than 100% of the equity in a nonfinancial firm and it must be passive
23
Table 7 Capital Requirements

What is the minimum capital-asset ratio requirement? Is this ratio risk weighted in line with the Basle guidelines? Is subordinated debt allowable as part of capital?
Question
Does the minimum ratio vary as a function of an individual bank's credit risk?
Does the minimum ratio vary as a function of market risk?
8% 8%
Yes Yes Yes
No Yes No No
No Yes No Yes
Yes, but not practiced Yes Yes Yes
8% 8 % (12,5 % for newly established banks in the first three years of business) 10%
Yes
Germany
Yes
No
No
Yes
Hong Kong, China
Yes
Yes No; For credit risk, capital requirement varies on the basis of counterparty.
Yes No; Guidelines for capturing market risk for the trading book is to be issued to banks shortly.
Yes
India
9%
Yes
Yes
Italy
8%
Yes
No; However the Banca dItalia has the power to impose higher minimum capital requirements on banks, depending on their technical situation, risk appetite, loan portfolio quality, management, etc..
No
Yes
Japan Mexico Norway Philippines
8% (for internationally active banks) 8% 8% 10
Yes Yes Yes Yes
No Yes Yes Yes
No Yes Yes Yes
Yes Yes Yes Yes
24
Table 7 Capital Requirements

What is the minimum capital-asset ratio requirement? Is this ratio risk weighted in line with the Basle guidelines? Is subordinated debt allowable as part of capital?
Question
Does the minimum ratio vary as a function of an individual bank's credit risk?
Does the minimum ratio vary as a function of market risk?
Russia
10% or 11% depending on the amount of the banks own resources (capital): for banks with capital above 5 million EUR 10%, for banks with capital less than 5 million. EUR 11% 10% 8% 8%
Yes
No
No; Market risk is included into calculation of the capital adequacy ratio of each bank.
Yes
Yes Yes Yes
No No No
No No No
Yes Yes Yes
8% 8%
Yes Yes
Yes No
Yes No
Yes Yes
25
Table 7 (Cont) Capital Requirements

Before minimum capital adequacy is determined, which of the following are deducted from the book value of capital? What fraction of revaluation gains is allowed as part of capital? Market value of loan losses not realized in accounting books? N/A a. bank's premises: 100% (provided that the revaluations are subject to audit review consistent with bank accounting and auditing practice in Australia) b. marketable securities and other assets: 45% of any upward revaluations (the full effect of any subsequent devaluations should be incorporated in capital) None 45 % for real estate, 35 % for securities 70% of property and non-trading securities revaluation reserves and 45% of latent reserve of long-term holding of equity securities 45 per cent of revaluation gains are allowed to be taken as a part of Tier II capital subject to the total Tier II capital not exceeding 100 per cent of Tier I capital. No Unrealized losses in securities portfolios? No Unrealized foreign exchange losses? No
Question
Is subordinated debt required as part of capital?
PRC
No
Australia
No
Yes
Yes
Yes
Canada France Germany
No No No
No No Yes; deduction only upon order by the BaFin
Hong Kong, China
No
No
Yes
Yes
India
No
Yes
Yes
Yes
Italy
No
Net unrealized revaluation gains may be allowed as part of supplementary capital up to 35% of their amount provided that they do not exceed 30% of core capital.
No, loans are not marked to market. However the following items are deducted:a) loan losses related to country risk that are not realized in accounting books;b) loan losses of substantial amount incurred after year-end results and interim results have been published.
Yes, 50% of net unrealized losses in securities portfolios have to be deducted.
No
26
Table 7 (Cont) Capital Requirements

Before minimum capital adequacy is determined, which of the following are deducted from the book value of capital? What fraction of revaluation gains is allowed as part of capital? Market value of loan losses not realized in accounting books? 45% 100% Not applicable 100% Revaluation gains (the result of property gains at the expense of revaluation) are included in Tier II capital, which is limited by the amount of core capital. In accordance with the Bank of Russias new regulation (215-P) revaluation reserves will be included in Tier II capital once in three years. 50% up to 100% of the tier 1 capital N/A No Yes No No Unrealized losses in securities portfolios? Yes Yes No Yes Unrealized foreign exchange losses? Yes Yes No No
Question
Is subordinated debt required as part of capital?
Japan Mexico Norway Philippines
No Yes No No
Russia
No
Yes
Yes
Yes
No No No
Yes No Yes
Yes No Yes
Yes No Yes
No No
Potentially 100%, but subject to prudential criteria 45%
No No
Yes Yes
Yes Yes
27
Table 8 External Auditing Requirements and Examinations

Does the supervisory agency have the right to meet with external auditors to discuss their report without the approval of the bank? Yes Yes Yes Yes Yes Yes Yes Are auditors required by law to communicate directly to the supervisory agency any presumed involvement of bank directors or senior managers in illicit activities, fraud, or insider abuse? No No Yes Yes Yes Yes Yes
Question
Is an external audit a compulsory obligation for banks?
Are specific requirements for the extent or nature of the audit spelled out?
Are auditors licensed or certified?
Do supervisors get a copy of the auditor's report?
PRC Australia Canada France Germany Hong Kong, China India
No Yes Yes Yes Yes Yes Yes No, as a general rule. However audit is compulsory for listed companies and unlisted companies controlled by listed companies; as consequence, audit is compulsory for all listed banks or banks whose parent company is listed. Yes Yes Yes Yes Yes Yes Yes No Yes Yes
No Yes Yes Yes Yes Yes Yes
Yes Yes Yes Yes Yes Yes Yes
Yes Yes Yes Yes Yes Yes Yes
Italy
Yes
Yes
Yes
Yes, external auditors to discuss their report without the approval of the bank?
Yes, agency any presumed involvement of bank directors or senior managers in illicit activities, fraud, or insider abuse?
Japan Norway Philippines Russia South Africa South Korea Switzerland Taipei, China United Kingdom United States
Yes Yes No Yes Yes Yes Yes No Yes Yes
Yes Yes Yes Yes Yes Yes Yes No Yes Yes
Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
No Yes No Yes Yes Yes Yes No No Yes
No Yes No No Yes No Yes Yes Yes No
28
Table 8 (Cont) External Auditing Requirements and Examinations

Can supervisors take legal action against external auditors for negligence? No No Yes Yes No; but supervisor can refuse external auditor acc. To sec.28 of the Germany Banking Act No How frequently are onsite inspections conducted in large and medium size banks? No clear practice Every two years Annually Every two years If an infraction of any prudential regulation is found by a supervisor, must it be reported? Yes Yes Yes Yes Are there mandatory actions in these cases? Yes No No Yes
Question
Who authorizes exceptions to such actions?
N/A APRA N/A -
Germany
Annually
Yes
No
N/A
Hong Kong, China
Annually
Yes
No
India
No
Annually
Yes
Yes
Not applicable Board for Financial Supervision (RBI) / Government of India
Italy
No, the Banca dItalia cannot, but the Italian Securities and Exchange Commission (Consob) can, vis-vis listed companies.
Less frequently
Yes
Yes
No exceptions are applicable
Japan
Yes
As an approximation, for large banks: Annually, for medium size banks: every two years. Annually
Yes
Yes
No exception
Norway
Yes
Yes
No
N/A Monetary Board of the Bangko Sentral ng Pilipinas
Philippines
No
Annually
Yes
Yes
Russia
No
The frequency of on-site examinations does not depend on the size of the bank. The on-site inspections are conducted no less than once per two years Annually
Yes
Yes
Ministry of Finance
South Africa
Yes
Yes
Yes
Registrar of Banks Financial Supervisory Commission SFBC N/A Not provided N/A
South Korea Switzerland Taipei, China United Kingdom United States
Yes Yes No No Yes
Annually Annually N/A Not provided Annually
Yes Yes N/A Yes Yes
Yes Yes N/A No Yes/No
29
Table 9 Liquidity and Diversification Requirements

Are there explicit, verifiable, and quantifiable guidelines regarding asset diversification? (for example, are banks required to have some minimum diversification of loans among sectors, or are there sectoral concentration limits)? No No Yes Yes Are banks prohibited from making loans abroad? Restricted No No No Are banks required to hold either liquidity reserves or any deposits at the Central Bank? Yes No No Yes
Question
If so, what are these requirements?
7% in 2003 N/A N/A N/A Liquidity reserves: Weighted short term assets/weighted short term liabilities >= 1 acc. to sec. 11 Banking Act and Principle II concerning the liquidity of institutions Minimum reserves: Art. 19 of the by-laws of the European System of Central Banks Not applicable
Germany
No
No
Yes
Hong Kong, China
No Yes; Exposure limits on individual/ group borrowers and limits on capital market exposure have been provided by RBI. Exposure limits on other sectors left to management of banks to have prudential limits which have to be monitored on an on-going basis. No, there are only concentration limits vis--vis individual borrowers or groups of connected borrowers (large exposure rules). Yes; ( large lending limit) No
No
No
India
No
Yes
Cash Reserve Ratio (CRR) at 5.5% (at present) of Net Demand & Time Liabilities (NDTL)
Italy
No
The only requirement is the minimum reserve requirement set by the European Central Bank. Yes No
2% Legal reserve requirement. Financial institutions subject to the requirement are required to deposit a certain ratio of its deposit to the BOJ. N/A Reserves on deposits and deposit substitute liabilities: 1. Statutory reserves is at 9% wherein at least 25% shall be in the form of deposits with the BSP.2. Liquidity reserves is at 8% in the form of short-term market yielding government securities
Japan Norway
No No
Philippines
Yes
No
Yes
30
Table 9 Liquidity and Diversification Requirements

Are there explicit, verifiable, and quantifiable guidelines regarding asset diversification? (for example, are banks required to have some minimum diversification of loans among sectors, or are there sectoral concentration limits)? Are banks prohibited from making loans abroad? Are banks required to hold either liquidity reserves or any deposits at the Central Bank?
Question
If so, what are these requirements?
Russia
No
No
Yes; banks are demanded to hold obligatory reserves on deposits opened within the banks.
The Bank of Russia has the right to establish normative of obligatory reserves for credit organization. The normative can not be more than 20 % liabilities of credit organization. 2,5% of adjusted liabilities as minimum reserve balance with the South African Reserve Bank; 5% of reduced liabilities as liquid assets. These requirements are reserve, comprising deposits at the Central Bank and the cash held by banks(vault cash). Up to 35% of total reserves may be held in the form of vault cash. According to article 16a-f of the current National Bank law, SNB can impose reserve requirements on banks. The National Bank has not made use of this possibility since 1977. The Cash liquidity requirement defined in the Banking ordinance actually plays the role of a reserve requirement. Banks have to maintain a ratio of 2.5% at the latest between their liquidity holdings and their short term liabilities. 17% of total deposits Minimum liquidity requirements are set for banks on an individual basis within either a maturity mis-match or stock liquidity framework. Banks are also required to hold noninterest bearing deposits at the central bank (subject to a minimum liability threshold) for operational purposes and to help fund the central bank. No set percentage
South Africa
Yes
No
Yes
South Korea
Yes
Yes
Yes
Switzerland
Yes
No
Yes
Taipei, China
No
Yes
Yes
United Kingdom
No
No
Yes
United States
Yes
No
Yes
31
Table 9 (Cont) Liquidity and Diversification Requirements

Do these reserves earn any interest? Yes, 1.89% in 2002 No No Yes Yes (minimum reserves at the Central Bank) Not applicable Yes; Eligible CRR holdings (i.e., beyond 3% and up to stipulated CRR) earn interest. Yes; The average rate for the refinancing operations carried out by the European System of Central Banks during the maintenance period. No N/A Yes; Up to 40% of the total required reserves with the BSP earn 4%; liquidity reserves earn interest based on market rate of government securities. No Yes (no set ratio) No Yes (ratio not available) No There is no such restriction in Hong Kong No No No No No Are banks allowed to hold reserves in foreign denominated currencies or other foreign denominated instruments? Are banks required to hold reserves in foreign denominated currencies or other foreign denominated instruments?
Question
PRC Australia Canada France Germany
Hong Kong, China
India
No
No
Italy
No
No
Japan Norway
No Yes
No No
Philippines
No
No
Russia
No
No
32
Table 9 (Cont) Liquidity and Diversification Requirements

Do these reserves earn any interest? Are banks allowed to hold reserves in foreign denominated currencies or other foreign denominated instruments? No Are banks required to hold reserves in foreign denominated currencies or other foreign denominated instruments?
Question
South Africa
No
No Yes, the ratios vary from 1% to 5% depending on the type of banks' deposits
South Korea
No
No
Switzerland
Yes; Balances on current account held at SNB do not earn an interest. Balances on postal checking accounts earn an interest. The interest paid on postal checking accounts is bank and time dependent. Yes Not provided No
No
No
Taipei, China United Kingdom United States
Yes (ratio not available) No
No No
33
Table 10 Provisioning Requirements

The primary system for loan classification is based on (please pick one): Question Is there a formal definition of a "non-performing loan"? the number of days a loan is in arrears a forward looking estimate of the probability of default Yes Yes; APRA's definitions of different types of impaired assets (e.g., non-accrual items, restructured items) are based on a combination of number of days a facility is in arrears as well as a forward looking estimate of the probability of default. Refer to AGN 220.1 Impaired Asset Definitions at APRA's website. Yes Yes Not applicable Yes Yes; APRA's definitions of different types of impaired assets (e.g., non-accrual items, restructured items) are based on a combination of number of days a facility is in arrears as well as a forward looking estimate of the probability of default. Refer to APRA's website. Yes No Yes Yes No No Not applicable
Other
PRC
Yes
Australia
No
Canada France Germany Hong Kong, China
Yes Yes No Yes Yes; Non-performing Asset (NPA) shall be an advance where interest and/or installment of principal remain overdue for a period of more than 180 days at present. However, it has been decided to adopt the 90 days overdue norm for identification of NPAs, from the year ending March 31, 2004. Yes Yes Yes Yes Yes Yes Yes Yes Yes No No
India
Yes
No
No
Italy Japan Norway Philippines Russia South Africa South Korea Switzerland Taipei, China United Kingdom United States
No Yes No Yes Yes Yes Not applicable Yes Yes
No Yes Yes No Yes No Yes
Yes Yes
No Yes No
Yes No No Yes
34
Table 10 (Cont) Provisioning Requirements

After how many days is a loan in arrears classified as: Question Sub-standard ? PRC Not specified Credit risk grading systems vary across banks. Therefore, the classifications are not standard terms used by banks in Australia. Refer to AGN 220.4 - Credit Risk Grading Systems at APRA's website. Doubtful? Not specified Loss? Not specified
Australia
See above
See above
Canada France Germany Hong Kong, China Unsecured > 3 mths and secured > 12 mths After 180 days, a loan in arrears is classified as a Sub-standard asset. However, it has been decided to adopt the ?90 days? overdue? norm for identification of NPAs, from the year ending March 31, 2004. A sub-standard asset is one, which has remained NPA for a period less than or equal to 18 months. Unsecured > 6 mths An asset is to be classified as doubtful, if it has remained NPA for a period exceeding 18 months as per present norms. However, with effect from March 31, 2005, an asset would be classified as doubtful if it remained in the sub-standard category for 12 months, in line with international norms. Not applicable A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly. In other words, such an asset is considered uncollectible and of such little value that its continuance as the bankable asset is not warranted although there may be some salvage or recovery value. 90 days -
India
Italy 90 days. However, restructured loans would be classified as substandard without 90 days past-due. Not applicable 90 180 days. However, even without 180 days past-due, there are other criteria which would classify the loan as Doubtful. Not applicable Other criteria after 5 days for unsecured loans with the delay in paying the relevant interests or with delay in paying whose principal; after 6-30 days for insufficiently secured loans with the delay in paying the relevant interest or with delay in paying whose principal; after 31-180 days for secured loans with the delay in paying the relevant interests or with delay in paying whose principal 180 3 months- 12 months 90
Japan
N/A
Norway Philippines
Not applicable 180-interest in arrears
Russia
after 5 days for insufficiently secured loans with the delay in paying the relevant interests or with delay in paying whose principal; after 6-30 days for secured loans with the delay in paying the relevant interest or with delay in paying whose principal
All other loans whose features do not allow them to be attributed to those specified above should be attributed to loss loans.
90 Less than 3 months N/A
365 More than 12 months Case by case
Not applicable Not applicable
35

What is the minimum provisioning required as loans become: Question Sub-standard? PRC 25% Banks in Australia can implement their own internal methodology for determining provisions or adopt the prescribed provisioning methodology specified by APRA. Under the prescribed provisioning methodology, the minimum provisioning required depends on the nature of the underlying facility and the number of days payments are past due. Refer to AGN 220.2 - Security Valuation and Provisioning, and AGN 220.3Prescribed Provisioning at APRA's website. N/A No minimum provisioning required; external auditors examine if risk provisioning is sufficient Not applicable Doubtful? 50% Loss? 100%
Australia
See above
See above
Canada France
N/A No minimum provisioning required; external auditors examine if risk provisioning is sufficient Not applicable 100 percent of the un-secured portion of the advance plus 20 per cent to 50 per cent of the secured portion depending upon the period for which the asset has remained doubtful. Also see Word format survey. There are no supervisory minimum provisioning requirements. N/A Not applicable 50% 50% 50% 50% Case by case 50% Not applicable 50%
N/A No minimum provisioning required; external auditors examine if risk provisioning is sufficient Not applicable The entire asset should be written off. If the assets are permitted to remain in the books for any reason, 100 percent of the outstanding should be provided for. There are no supervisory minimum provisioning requirements. N/A Not applicable 100% 100% 100% 100% Case by case 100% The level of provisioning is the amount of loss given default 100%
Germany
Hong Kong, China
India
A general provision of 10 percent on total outstanding should be made
Italy
There are no supervisory minimum provisioning requirements. N/A Not applicable secured-10% ;unsecured-25% 20% 20% 20% N/A 0% Not applicable 15%
Japan Norway Philippines Russia South Africa South Korea Switzerland Taipei, China United Kingdom United States
36

If a customer has multiple loans and one loan is classified as nonperforming, are the other loans automatically classified as nonperforming? No Yes No What is the tax deductibility of provisions: Specific provisions can be deducted General provisions can be deducted Provisions can not be deducted Specific provisions can be deducted Specific and General provisions can be deducted Specific provisions can be deducted Provisions cannot be deducted except for general provisions for country risk Specific provisions can be deducted & general provision can be deducted but limited by taxation rules Specific provisions can be deducted Specific provisions can be deducted Specific provisions can be deducted and general provisions can be deducted Both general and specific provisions which meet certain conditions, are eligible for the tax deduction General provisions can be deducted Provisions cannot be deducted Specific provisions can be deducted Specific provisions can be deducted Specific provisions can be deducted General provisions can be deducted No Specific provisions can be deducted No Yes, if the breaches are significant enough to constitute an unsafe or unsound practice Yes Not available No Yes Yes; cover potential losses only; actual losses do not apply Yes Yes Does inaccurate classification of loans or underestimation of provisions bring about penalties? Can the supervisory agency order the bank's directors or management to constitute provisions to cover actual or potential losses?
Question
PRC
Yes Yes
Yes Yes Yes
Australia Canada
France
Yes
Yes
Yes
Germany
No
Yes
No
Hong Kong, China India
No Yes
Yes Not available
Yes Yes
Italy
Yes
Japan
No
Norway Philippines Russia South Africa South Korea Switzerland Taipei, China United Kingdom
Yes No Yes Yes Yes No No No
United States
No
Provisions cannot be deducted
Yes
37
Table 11 Accounting and Information Disclosure Requirements

Does accrued, though unpaid, interest/principal enter the income statement while the loan is still performing? Does accrued, though unpaid, interest/principal enter the income statement while the loan is still non-performing? Are financial institutions required to produce consolidated accounts covering all bank and any non-bank financial subsidiaries? Yes Yes Yes Yes Yes Yes No No Yes Yes No 90 90 N/A N/A Unsecured > 3 mths and secured > 12 mths Yes Yes Yes No Yes No; Consolidated accounting is being introduced with effect from March 2003. Must banks disclose their risk management procedures to the public?
Question
After how many days in arrears must interest income accrual cease?
Are off-balance sheet items disclosed to supervisors?
Are off-balance sheet items disclosed to the public?
PRC Australia Canada France Germany Hong Kong, China
Yes Yes Yes No Yes Yes
India
Yes
No
180
Yes
Yes
No
Italy
Yes
Yes, only if and to the extent the bank judges that the overdue interests can be collected. No Yes
N/A
Yes
Yes
Yes
Yes
Japan Norway
Yes Yes
180 According to individual assessment 30 except certain installment loans
Yes Yes
Yes Yes
Yes Yes
Yes No
Philippines Russia
Yes Yes
No
Yes Yes
Yes Yes
Yes Yes
Yes No
38
Table 11 Accounting and Information Disclosure Requirements

Does accrued, though unpaid, interest/principal enter the income statement while the loan is still performing? Does accrued, though unpaid, interest/principal enter the income statement while the loan is still non-performing? No No No Are financial institutions required to produce consolidated accounts covering all bank and any non-bank financial subsidiaries? Yes Yes Yes Must banks disclose their risk management procedures to the public?
Question
After how many days in arrears must interest income accrual cease?
Are off-balance sheet items disclosed to supervisors?
Are off-balance sheet items disclosed to the public?
South Africa South Korea Switzerland Taipei, China
Yes Yes Yes
180 14 for corporates, 3 for consumers 90 No number is prescribed. The directors of the bank would decide and the matter would be reviewed as part of the audit process. 90
Yes Yes Yes
Yes Yes Yes
Yes Yes Yes
United Kingdom
Yes
No
Yes
Yes
Yes
Yes
United States
Yes
No
Yes
Yes
Yes
No
39
Table 11 (Cont) Accounting and Information Disclosure Requirements

Are bank directors legally liable if information disclosed is erroneous or misleading? Do regulations require credit ratings for commercial banks? Are accounting practices for banks in accordance with U.S. Generally Accepted Accounting Standards (GAAS)?
Question
What are the penalties, if applicable?
Have they been enforced?
Are accounting practices for banks in accordance with International Accounting Standards (IAS)?
PRC
Persons in charge are legally liable
Displinary Measures, Dismissed Will be subject to imprisonment and/or a fine of certain amount in accordance with the provisions of the Corporations Law and the Criminal Code. N/A See the CRBF, Banking Act article 45 Fine acc. to sec. 56 Banking Act or fine/prison sentence acc. to sec. 340m in conjunction with sec. 331 of the German Commercial Code (HGB) A director is liable to financial penalties or imprisonment. Imprisonment and monetary fine as applicable for erroneous/misleading information provided to supervisors. (Note: Sec-47, BR Act, 1949:
No
No
No
No
Australia
Yes
Yes
No
Yes
Yes
Canada France
Yes Yes
No Yes
No No
Yes No
No No
Germany
Yes
Yes
No
No
No
Hong Kong, China
Yes
No
No
Yes
No
India
Yes
Yes
No
No
No
Italy
Yes
Criminal and administrative sanctions
Yes
No
No, accounting practices are consistent with European Union legislation. Where no specific provisions are laid down in the relevant directives, IAS principles are sometimes used (i.e., IAS 8, IAS 12 and, partially, IAS 39).
No
40
Table 11 (Cont) Accounting and Information Disclosure Requirements

Are bank directors legally liable if information disclosed is erroneous or misleading? Do regulations require credit ratings for commercial banks? Are accounting practices for banks in accordance with U.S. Generally Accepted Accounting Standards (GAAS)?
Question
What are the penalties, if applicable?
Have they been enforced?
Are accounting practices for banks in accordance with International Accounting Standards (IAS)?
Japan Norway Philippines
Yes Yes Yes
Penal servitude or fine, reparations to the damage of the securities holders. Fines and in severe cases imprisonment Administrative sanctions, including monetary penalties and penal sanctions
Yes Yes Yes
No No No
Yes No Yes No; the Russian banking system is transferred to the IAS, the work on transferring is not over yet. Some banks provide the Bank of Russia along with the Russian Accounting Standards reports with the IAS reports. Yes Yes Yes
Yes No Yes
Russia
Yes
No
No
South Africa South Korea
Yes Yes Yes
As per Companies Act: sec 424 In case of false disclosure, the administrative measures, criminal penalties can be enforced. See Art. 3 par. 2 letter c Banking Law, Art. 49 Banking Law UK law provides for both criminal and civil penalties depending on the circumstances of each case Subject to financial penalties and other administrative remedies
No Yes Yes
No Yes No
No Yes Yes
Switzerland Taipei, China United Kingdom
Yes
Yes
No
No
No
United States
Yes
Yes
No
No
Yes
41
Table 12 Discipline and Problem Institutions Insolvency

Are there any mechanisms of cease and desist-type orders, whose infraction leads to the automatic imposition of civil and penal sanctions on the banks directors and managers? Yes, but because a commercial bank violates the Regulation on the Administration of Financial Institutions Yes Are bank regulators/supervisors required to make public formal enforcement actions, which include cease-and desist orders and written agreements between a bank regulatory/supervisory body and a banking organization?
Question
Can the supervisory agency suspend the directors' decision to distribute dividends, bonuses, and management fees?
Which laws address bank insolvency?
Who can legally declare - such that this declaration supersedes some of the rights of shareholders - that a bank is insolvent:
PRC
Yes
Dividends and bonuses
Commercial Bank Law
Court
Australia
No
Dividends, bonuses and management fees Dividends
Corporations Law Bank Act / Winding-Up and Restructuring Act / Canada Deposit Insurance Corporation Act Code Montaire et Financier (Financial and Monetary Code) Sec. 46b Banking Act and the Insolvency Code. Laws include the Companies Ordinance, the Bankruptcy Ordinance and some of the provisions in the Banking Ordinance.
Court
Canada
No
No
Court Court. Commission Bancaire's notice prior court's declaration Bank supervisor
France
No
No Yes (In some cases, e.g., the revocation of the license, has to be published in the Federal Gazette)
Dividends
Germany
No
Dividends
Hong Kong, China
No
No
Dividends, bonuses and management fees
Court
42

Are there any mechanisms of cease and desist-type orders, whose infraction leads to the automatic imposition of civil and penal sanctions on the banks directors and managers? Are bank regulators/supervisors required to make public formal enforcement actions, which include cease-and desist orders and written agreements between a bank regulatory/supervisory body and a banking organization?
Question
India
Yes
Yes
Dividends and bonuses
Banking Regulation Act, 1949 and Companies Act, 1956
Government of India. Reserve bank of India applies to Government of India under Section 45 of Banking Regulation Act, 1949 for suspension of business by a banking company and to prepare scheme of reconstitution or amalgamation The Courts have the legal power to declare the insolvency status. However, the Bank of Italy, independently from the Courts declaration, can propose to the Minister of the Economy and Finance the compulsory administrative liquidation of a bank in each of the following cases: exceptionally serious violations of prudential requirements, exceptionally serious irregularities in the banks administration, and exceptionally serious financial losses.
Italy
No
Yes
No
The 1993 Banking Law
Japan
Yes
No
Bonuses and management fees
The Deposit Insurance Law. The Financial Function Reconstruction Law. (There are other bankruptcy related laws) The Guarantee Schemes Act
Bank supervisor
Norway
No
No
No
The responsibility lies with the Ministry of Finance
43

Are there any mechanisms of cease and desist-type orders, whose infraction leads to the automatic imposition of civil and penal sanctions on the banks directors and managers? Yes Are bank regulators/supervisors required to make public formal enforcement actions, which include cease-and desist orders and written agreements between a bank regulatory/supervisory body and a banking organization? No
Question
Philippines
Dividends, bonuses and management fees
Sections 29 to 33 of the New Central Bank Act The Federal Laws:On Banks and BankingOn the Central Bank of the Russian Federation (Bank of Russia) On the Insolvency (Bankruptcy)On the Insolvency (Bankruptcy) of Credit Institutions Companies Act & Insolvency Act read together with Banks Act Banking Act, Act on Structural Improvement of the Financial Industry Art. 36 ff. Banking Law The Company Law, Insolvency Insolvency Act 1986, Financial Services and Markets Act 2000
No
Russia
Yes
Yes (cease and desist orders only; others do not apply)
Dividends
Bank supervisor, Court, and bank restructuring or asset management agency
South Africa
No
Yes
Dividends
No
South Korea
Yes
No
Dividends, bonuses and management fees Dividends, bonuses and management fees Dividends
Bank supervisor
Switzerland Taipei, China
No Yes Yes
No
No
United Kingdom
Yes
Dividends, bonuses and management fees Dividends, bonuses and management fees
Court
United States
No
Yes
12 USC 191 and 1821
Bank supervisor
44
Table 12 (Cont) Discipline and Problem Institutions Insolvency

According to the Banking Law, who has authority to intervene that is, suspend some or all ownership rights - a problem bank? Bank supervisor Does the Law establish predetermined levels of solvency deterioration which forces automatic actions (like intervention)? Can the supervisory authority force a bank to change its internal organizational structure Regarding bank restructuring and reorganization, can the supervisory agency or any other government agency do the following: Supersede shareholder rights?
Question
Remove and replace management?
PRC
No
Yes
Bank supervisor Bank supervisor, Court , deposit insurance agency and bank restructuring or asset management agency Bank supervisor, and bank restructuring or asset management agency
Bank supervisor
Australia
Court Bank supervisor, Court, deposit insurance agency Court Bank supervisor Bank supervisor, Court
No
Yes
Bank supervisor, court
Canada
No
No
Bank supervisor
France Germany Hong Kong, China
No No No
No Yes Yes Bank supervisor Court Bank supervisor
India
Bank supervisor, and RBI in consultation with Govt. of India can intervene under the Banking Law.
No (However, RBI has recently put in place a Prompt Corrective Action (PCA) framework under which certain interventions by supervisor are envisaged with some predetermined levels of solvency deterioration.)
Yes
Government of India
Bank supervisor
45

According to the Banking Law, who has authority to intervene that is, suspend some or all ownership rights - a problem bank? Does the Law establish predetermined levels of solvency deterioration which forces automatic actions (like intervention)? Can the supervisory authority force a bank to change its internal organizational structure Regarding bank restructuring and reorganization, can the supervisory agency or any other government agency do the following: Supersede shareholder rights? Bank supervisor (Supervisory authority can not expropriate the shareholders but can only limit their rights in case of special administration and compulsory administrative liquidation.) Bank supervisor The responsibility lies with the Ministry of Finance Bank supervisor
Question
Italy
Bank supervisor
No. The actions are discretionary.
Yes
Bank supervisor
Japan
Bank supervisor Bank supervisor; The responsibility lies with the Ministry of Finance Bank supervisor Bank supervisor, and bank restructuring or asset management agency Court; Curator appointed by Minister of Finance Bank supervisor Bank supervisor
Yes
Yes
Yes Bank supervisor (The responsibility lies with Kredittilsynet(The Banking Insurance and Securities Commission of Norway) Bank supervisor Bank supervisor, court and bank restructuring or asset management agency
Norway
Yes
No
Philippines
Yes
Yes
Russia
Yes
Yes
Bank supervisor and court
No Yes No
No Yes Yes Yes
Bank supervisor; Court Bank supervisor Bank supervisor
Court Bank supervisor Bank supervisor
Bank supervisor, Court Bank supervisor
No Yes
Yes Yes
Bank supervisor and court Bank supervisor
Bank supervisor and court Bank supervisor
46

Is court approval required for supervisory actions, such as superceding shareholder rights, removing and replacing management, removing and replacing directors, or license revocation? No No No No No Is court order required to appoint a receiver/liquidator in the event of liquidation? Can the bank shareholders appeal to the court against a decision of the bank supervisor?
Question
Remove and replace directors?
Forbear certain prudential regulations?
Who is responsible for appointing and supervising a bank liquidator/receiver:
PRC
Bank supervisor Bank supervisor, court Bank supervisor Bank supervisor Bank supervisor Bank supervisor Bank supervisor
Bank supervisor
Bank supervisor and court Bank supervisor and court
No Yes Yes No Yes
Yes Yes Yes Yes No
Australia Canada France Germany
Bank supervisor and deposit insurance agency
Court Bank supervisor
Deposit insurance agency The Monetary Authority can forebear certain prudential regulations only if it is explicitly provided in the Banking Ordinance.
Court
Hong Kong, China
Bank supervisor
Court and the official receiver
No
Yes
Yes
India
Bank supervisor
Bank supervisor
Deposit insurance agency
Govt. of India with RBIRBI (after consultation with the Government of India) applies to court for appointment of bank liquidator/receiver.
No (While RBI can remove /replace management/ Directors, only Govt of India is empowered to acquire banking undertakings and thus also supercede shareholders rights. (Section 36 AA, Sec 36 AB and Sec 36AE of BR Act 1949)) No No
Yes
Yes
Italy Japan
Bank supervisor Yes Bank supervisor
Bank supervisor deposit insurance agency
Bank supervisor Yes
No Yes No
47

Is court approval required for supervisory actions, such as superceding shareholder rights, removing and replacing management, removing and replacing directors, or license revocation? Is court order required to appoint a receiver/liquidator in the event of liquidation? Can the bank shareholders appeal to the court against a decision of the bank supervisor?
Question
Remove and replace directors?
Forbear certain prudential regulations?
Who is responsible for appointing and supervising a bank liquidator/receiver:
Norway
Bank supervisor (The responsibility lies with Kredittilsynet(The Banking Insurance and Securities Commission of Norway) Bank supervisor Bank supervisor, court and bank restructuring or asset management agency Court Bank supervisor Bank supervisor
Bank supervisor (The responsibility lies with Kredittilsynet (The Banking Insurance and Securities Commission of Norway) Bank supervisor Bank supervisor, court and bank restructuring or asset management agency Court Bank supervisor Bank supervisor
Bank supervisor (The responsibility lies with the Minister of Finance)
Bank supervisor
No
No
Philippines
Bank supervisor deposit insurance agency Bank supervisor deposit insurance agency Bank supervisor
Bank supervisor Bank supervisor and court Court Bank supervisor Bank supervisor
No No Yes No No
No Yes Yes No No Yes Yes
Russia South Africa South Korea Switzerland Taipei, China United Kingdom
deposit insurance agency and court
Bank supervisor and court Bank Supervisor appoints the Federal Deposit Insurance Agency as Receiver/Liquidator. FDIC supervises itself, court intervention is possible.
No
Yes
Yes
United States
Bank supervisor
Bank supervisor
Bank supervisor
No
No
No
48
Table 13 Deposit Insurance Schemes

Question Is there an explicit deposit insurance scheme? No No Yes Yes Yes; Established on 8/1/98. Previously other private or voluntary protection systems existed No Yes Yes. According to the 1993 Banking Law two systems operate at present: the Interbank Fund for Protection of Deposits (FITD) comprising all Italian banks except for mutual banks; the Mutual Bank Depositor Guarantee Fund for mutual banks. Yes Jointly Rs.100,000 per depositor No Ex ante fund Deposits 0.05 Jointly Privately Compulsory Compulsory C$60,000 per depositor FRF 400,000 per depositor No No Ex ante fund Ex post fund Insured deposits N/A Insured deposits in commercial bank DIS; risk-assets in other DIS Risk-based On demand, but limited Is it funded privately, publicly or jointly? Is the scheme compulsory or voluntary? Insurance limit per account or per depositor? Co-insurance Ex ante or ex post fund Assessment Base Premiums %
PRC Australia Canada
France
Germany
Privately
Compulsory
30% of bank's equity capital per depositor
Yes
Ex ante fund
Official is 0.03,but can be doubled
Hong Kong, China India
Italy
Jointly
Compulsory
EURO 103,291 per person
No
Ex post fund
Protected funds adjusted for size and risk
Risk adjusted expost 0.4 to 0.8
Japan
Jointly
Compulsory
10 million per depositor
No
Ex ante fund
Insured deposits
0.048+0.036
49
Table 13 Deposit Insurance Schemes

Question Is there an explicit deposit insurance scheme? Is it funded privately, publicly or jointly? Is the scheme compulsory or voluntary? Insurance limit per account or per depositor? Co-insurance Ex ante or ex post fund Assessment Base Premiums %
Mexico
Yes
Jointly
Compulsory
No limit per depositor
No
Ex ante fund
All obligations Risk-weighted assets and total deposits Deposits
0.3(max 0.5) plus 0.7 is needed 0.005 of assets and 0.01 of total deposits 0.2
Norway
Yes
Jointly
Compulsory
NOK 2 mil per person P100,000 per account/per person
No
Ex ante fund
Philippines Russia South Africa South Korea Switzerland
Yes No No Yes Yes
Jointly
Compulsory
Yes
Ex ante fund
Jointly Privately
Compulsory Voluntary
14,600 per depositor CHF 30,000 per person
No No
Ex ante fund Ex post fund
Deposits Balance sheet items
Risk-based:0.00 to 0.27 On demand
Taipei, China
Yes
Jointly
Compulsory
$38.500 per depositor Larger of 90% coinsurance to $33,333 or ecu22.222 per depositor US$ 100,000 per depositor
No
Ex ante fund
Insured deposits
0.015
United Kingdom
Yes
Privately
Compulsory
Yes
Small((5m to 6m) mainly ex post fund
Insured deposits
On demand
United States
Yes
Jointly
Compulsory
No
Ex ante fund
Domestic deposit
Risk-based:0.00 to 0.27
50
Table 13 (Cont) Deposit Insurance Schemes

If yes, does the deposit insurance authority have the legal power to intervene/takeover a troubled (not insolvent) bank? Has the deposit insurance agency ever taken any legal action against bank directors/officials?
Question
Insure foreign currencies
Insure interbank deposits
Does deposit insurance authority make the decision to intervene a bank?
If no, who does?
Average time to pay depositors in full
PRC Australia Yes, CDIC has the power to intervene in the affairs of its members, including closure decisions. However, decisions are made in coordination with the appropriate regulator/supervisor. No No The Comission Bancaire Bundesaufsichtsamt
Canada
No
Yes
Yes
1 to 8 weeks
Yes
France Germany Hong Kong, China India
Yes Yes
No No
2 to 6 months Not applicable
No No
Yes
No
No
Reserve Bank of India
6 months In Italy, the beginning of a compulsory liquidation procedure is immediately followed by the transfer of assets and liabilities of the bank in liquidation to another bank. This last one is responsible for the liabilities of the resolved bank. So no timeN.A.
No
Italy
No
No
Yes. According to the 1993 Banking Law the decisions to intervene a bank are made by the funds governing bodies. However, the intervention must be authorized by the Bank of Italy.
N/A
No
Japan
No
No
No
FRC and FRA intervene when necessary. National Banking & Securities Commission
No
Mexico
Yes
Yes
No
Same day
No
51
Table 13 (Cont) Deposit Insurance Schemes

If yes, does the deposit insurance authority have the legal power to intervene/takeover a troubled (not insolvent) bank? Has the deposit insurance agency ever taken any legal action against bank directors/officials?
Question
Insure foreign currencies
Insure interbank deposits
Does deposit insurance authority make the decision to intervene a bank?
If no, who does?
Average time to pay depositors in full
Norway
No
No
No
Kreditilsynet (The Banking Insurance and Securities Commission of Norway) The Bangko Sentral ng Pilipinas
1 month
No
Philippines Russia South Africa South Korea Switzerland Taipei, China
Yes
Yes
No
3 mos from closing date No
Yes
No No No
No No No
Yes No No
N/A SFBC Banking competent regulator
No
3 months N/A Not available The rule is 3 months though insolvency and banking law requirements can delay the process No
United Kingdom
Yes
No
No
FSA
Not reported
United States
Yes
Yes
Yes
Yes
3 days
Yes
52
Table 14
Risk Concentrations
Question Is there any If yes, what is the ratio? Off-balanceprudential sheet ratio? exposures included Yes Yes Yes Yes 10% 25% 25% 25% No Yes Yes Yes Definition of a single borrower Definition of capital Definition of connected lending Limit on connected lending Is there exemption from large exposure limit? No Yes Yes Yes
PRC
No A common risk A single risk Parent-subsidiary
Canada
EU
Hong Kong
India
Yes
15% for a single borrower ; 40% for a borrower group
Yes
Korea
Yes
Taipei, China
Yes
15% for the same borrower or corporation; 30% for debt payment guarantee;20% for the same borrower or corporation sharing credit risk 3% and 15%of net worth for a natural and a legal person, respectively
Yes
Left to the perception of the bank, the guiding principle being commonality of management and effective control Share credit risk
As defined in the Related party capital adequacy regulation As defined in the Related party capital adequacy regulation As defined in the Parent-subsidiary capital adequacy regulation As defined in the Director and his capital adequacy relatives; employee regulation in charge; controller, etc. As defined in the Director and firms capital adequacy which director has regulation interests.
10% Prohibited 20% 10% or 5%
Prohibited
Yes
As defined in the capital adequacy regulation
Officers or employees of the bank's subsidiaries
Prohibited
N/A
Yes
Relatives, parentsubsidiary
Net worth
USA
Yes
15% for a single borrower ; 50% for a corporate group
Yes
direct benefit or common enterprise exists
Unimpaired capital and unimpaired surplus
Discretion of the bank in consultation with competent authority executive officers, 15% with directors, principal additional shareholders or their limitations related interest
Shareholders, employees and affiliates
N/A
Yes
53
APPENDIX B WTO COMMITMENT INTL COMPARISONS
B. WTO Commitment and Compliance Tables of International Comparisons

4 COMPARATIVE TABLES
(PAGES 54-61)
Table 1 Capital Requirements in Various Countries1

HK, China United United United Kingdom States(FED) States(OCC)
Questions
Australia
India
Italy
Japan
Korea
Mexico
Poland
Russia
Singapore
What is the minimum capital entry requirement? (in US$ and/or domestic currency, state which)
EURO 5 million
$5 5 million MEUR CND
Is this minimum capital entry requirement the same for a foreign branch and subsidiary?
1
No in case of a branch of a bank from an EUmember state. Yes in case of a branch or
Yes
Yes
The minimum capital entry In requirement domestic (for the currency granting of for Indian banking banks, licenses) 0.12 of Rs.200 amounts to S$1.5 billion crore Euro 6.3 total HK$300 2 billion 100,000,000,000 5,000,000 5 million for locally 5 million 5 Mio assets which is million for mn Yen won EUR EUR incorporated in the required to banks bank be raised established system to Rs.300 as limited crore, companies within the and banche next three popolari, years and Euro 2 million for mutual banks. No; A No; For a Yes; foreign foreign Yes for non Branches branch, its bank Yes for EU of foreign head office desirous of subsidiary opening subsidiaries No Yes Yes Yes banks are should have Yes No for branches and not capital funds branch currently of not less in India is branches. required to allowed than S$200 bring in million; and
No absolute No minimum; see minimum attachment
No; see attachment
Yes
Cited from Entry into Banking, World Bank Survey II.
54
Questions
Australia
HK, China
India
Italy
Japan
Korea
Mexico
Poland
Russia
Singapore
United United United Kingdom States(FED) States(OCC)
subsidiary of a bank from a nonEU member state.
assigned minimum capital of US $ 25 million, of which US$ 10 million shall be brought in at the time of opening each of the first two branches and the balance of US$ 5 million at the time of opening the third or more branches.
the branch should maintain net head office funds of not less than S$10 million in Singapore ( including S$5 million in approved assets).
55
Table 2 Measures that appear to treat foreign financial institutions less favorably
Foreign Financial Institution
To incorporate FFB or FFFC or participate in JEB or JEFC must be financial institution (Regs. Arts. 6 & 8) 30% of operating capital of FBB to be in interestbearing assets as prescribed by PBC (Regs. Art. 24) Fixed assets of FFB, JEB, FFFC, and JEFC not to exceed 40% of equity (Regs. Art. 27) The largest shareholder of a wholly foreign-owned bank or a JEB must be a commercial bank. (Rules, Arts. 4 & 5) For FFB, JEB, FFFC, and JEFC, ratio of Rmb assets in capital to Rmb assets in risk assets not less than 8%. For FBB ratio of share of Rmb assets in total amount of operating capital plus reserves to share of Rmb assets in risk assets not less than 8%. (Regs, Art. 28) Total foreign exchange deposits taken in the PRC not No counterpart Does this have prudential basis? No counterpart No counterpart Possibly prudential but may raise national treatment issues Not clear No counterpart Possibly prudential because foreign bank parent not subject to supervision by PBC
Domestic Financial Institution

No requirement Possibly prudential
Comments
Abbreviations: FBB FFB JEB FFFC JEFC Regs Rules
And their meaning: Foreign Bank Branch Foreign-Funded Bank Joint Equity Bank Foreign-Funded Finance Company Joint Equity Finance Company Regulations of the Peoples Republic of China on the Administration of Foreign-Funded Financial Institutions, 1 Feb 2002 Detailed Rules for the Implementation of the Regulations of the PRC on the Administration of Foreign-Funded Financial Institutions, 1 Feb 2002 56 FINAL REPORT - 15 DECEMBER 2003
Foreign Financial Institution

to exceed 70% of total foreign exchange assets in the PRC (Regs. Art. 30) May not apply for new branch until one year after last branch approval (Rules, Art. 15) Applicant for branch bank must have practiced in the PRC for at least 3 years and been profitable for last two (Rules, Art. 15) Decision to accept application taken by PBC within six months (Rules, Art. 19) Rejected applicant may not refile in same city for one year (Rules, Art. 20) Working capital requirements for FBBs range from Rmb 100m. to Rmb 600m. (Rules, Arts.31-36)
Domestic Financial Institution
Comments
Ratio to be adjusted step-by-step by PBOC phase-out by 2006?
No counterpart
No counterpart
Because branch approval takes up to fourteen months, this effectively means that a foreign bank cannot open new branches more than once every two years. This provision was questioned during the October 2002 WTO Interim Review of the PRCs implementation of its financial services commitments. These requirements are listed in schedule only for authorization to conduct local currency operations, and not for branch operations generally.
Three months (Rules on Administration of Financial Institutions, Art. 15) Six months (Id.)
Reasonable prudential measure because of longer time needed to check foreign applications Questioned during Transitional Review
Working capital requirements for domestic banks Rmb 100m. (Interim Measures on the Establishment of Banks and their Branches, Art. 2)
Questioned during Transitional Review
Requirements to operate in local currency (three years in the PRC, last two profitable) applied city-by-city (Rules, Art. 38) Restriction on foreign participant in JEB owning more than 25% of bank
No counterpart
Schedule is ambiguous: Qualifications for foreign financial institutions to engage in local currency business are as follows:. Questioned during Transitional Review We have been informed that this is a matter of practice and we are unaware of any regulation or rule to this effect. Consistency with provision in horizontal commitment that foreign participant in joint venture must own at least 25% of joint venture
57
Table 3 Applicability of Host Country Endowment/ Dotational Capital Requirements for Branches of Non-Domestic Banking Organizations1
Host Country Applies Such A Capital Requirement Argentina Austria Belgium Denmark France Germany Indonesia Italy Korea The Netherlands Portugal Singapore South Africa Spain Host Country Does Not Apply Such A Capital Requirement Australia Bahrain Canada2 Cayman Islands Finland Hong Kong Ireland Japan Latvia Norway Sweden Switzerland United Kingdom United States3
1. 2.
3.
This table is cited from the Global Survey 2002 made by the Institute of International Bankers. Branches of non-domestic banking organizations are instead subject to host-country asset pledge requirements. Branches of non-domestic banking organizations are instead subject to host-country asset pledge requirements.
59
Table 4 Applicability of Asset Pledge Requirements to Branches of Non-Domestic Banking Organizations Operating in A Host Country
Branches Are Subject to Asset Pledge Requirements Canada United States Branches Are Not Subject to Asset Pledge Requirements Argentina Australia Bahrain Belgium Cayman Islands Czech Republic Denmark Finland France Germany Hong Kong India Ireland Italy Japan Korea Latvia Luxembourg Netherlands Norway Panama Philippines Poland Portugal Romania Singapore Spain Sweden Turkey United Kingdom
Table 5 Industrial-Firm Investments in Banks Country Canada

France Germany Industrial Firm Investments in Banks Permitted to hold up to 10% interest Not prohibited
Permitted subject to regulatory consent based on the suitability of the shareholder Permitted subject to regulatory consent based on the suitability of the shareholder
Permitted up to 30% of the capital and reserve of the investing company subject to approval of RBI of the transfer of 1%or more of the banks capital
Hong Kong, China
India
Italy
Permitted, up to 5% of shares of the bank, subject to the approval of the Bank of Italy
60
Country
Industrial Firm Investments in Banks
Japan
Permitted, provided total investment does not exceed investing firms capital or net assets. Acquisitions of shares in excess of 5% must be filed and shares equal or in excess of 20% subject to regulatory approval Permitted, up to 10% of the banks capital, but subject to prior approval based on suitability of the shareholder Permitted up 20% of the shares with approval Permitted Permitted, but acquisition of more than 25% of a banks shares requires the Central Bank of Russias prior approval Acquisition of 5%, 12% and 20% or more each require regulatory approval No statutory prohibition Permitted to make non-controlling investments up to 25% of the voting shares
Korea Mexico Poland Russia Singapore United Kingdom United States
61
APPENDIX C CREDIT INFO BUREAU INTL COMPARISONS PRC 3890 BANKING LAWS AND REGULATIONS
C. Credit Information Bureaus Table of International Comparisons

INFORMATION ON PRIVATE CREDIT BUREAUS FOR SELECTED COUNTRIES
(PAGE 62) COUNTRY Must Register with the Government Restrictions on Entry into Market Legal Restrictions that Discourage Private Credit Bureaus from Forming No Bureau Coverage of Individuals or Firms (as % of Population) Ownership of Credit Bureaus Type of Information Shared with Users -Negative Information or Other Information (e.g., accounts open, credit limits, balances) Negative Information and Other Information Only Negative Information Negative Information and Other Information Negative Information and Other Information Negative Information and Other Information
ITALY
No
No
42%
SPAIN
Yes
No
No
5%
SWEDEN
No
Yes
Yes
49%
UNITED KINGDOM
No
No
Yes
65%
UNITED STATES
No
No
No
81%
Private company owned by financial institutions Private company not owned by financial institutions Private company owned by financial institutions Private company not owned by financial institutions Private company not owned by financial institutions
Italy, Spain, Sweden, and United Kingdom * Limits on Information Collected: Sensitive personal information may not be collected under the European Directive; this includes data on racial or ethnic origin, political opinions, religious or philosophical beliefs, health matters and sexual orientation. * Limits on Distribution of Information: Requirements must be met by credit bureaus before providing information to third parties; information may be provided for credit transactions initiated by the consumer or for other lawful purposes. * Right to Access and Correct Information: Consumers may review information in their credit reports and may dispute inaccurate information. United States * Limits on Information Collected: Collection of sensitive personal information is not prohibited. However, Regulation B, which implements the Equal Credit Opportunity Act, generally prohibits creditors from collecting and considering information regarding race, color, religion, and national origin. * Limits on Distribution of Information: Information may be shared with third parties only for permissible purposes, such as for credit transactions. * Right to Access and Correct Information: Consumers may review information in their credit reports and may dispute inaccurate information.
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APPENDIX D ANTI-MONEY LAUNDERING INTL COMPARISONS
D. Anti-Money Laundering Table of International Comparisons

COMPARATIVE TABLES
(PAGES 63-72)
INTERNATIONAL STANDARDS
KEY ELEMENTS OF LAW
INTERNATIONAL COUNTRY COMPARISONS The following jurisdictions have criminalized ML to varying degrees, in terms of coverage of predicate offences: Hong Kong/China: Drug trafficking and serious crimes Indonesia: 15 serious offences Malaysia: 118 offences under various laws Philippines: 14 serious offences Singapore: Corruption, drug trafficking, and other serious offences S. Korea: Many offences under several categories Thailand: Many offences under 6 categories Australia: Any indictable offence Canada: Any indictable offence Japan: All serious crimes New Zealand: United Kingdom: All crimes United States: Many serious offences EU: Many countries
I. Vienna Convention 88 Palermo Convention 00 FATF 40, Recommendation 2a & Glossary FATF 8, Recommendation 2
Criminalization of ML AND FT
The crime of money laundering (ML) should be predicated on/originate from all serious offences with a view to including the widest range of predicate offences. Thus, the predicate offences should be broadly described to include all offences or all serious offences (including drug trafficking, terrorism, and financing of terrorism) defined by reference to a penalty of imprisonment (usually at least 6-12 months imprisonment) or a list of serious offences, or a combination of both. Whichever approach is adopted, a country should at a minimum include a range of offences within each of 20 designated categories of offences listed in FATF 40, Glossary.
FATF 40, Recommendation 1
Predicate offences should extend to offences committed in another jurisdiction, which constitute offences in that country, and which would have constituted offences had they been committed domestically.
FATF 40, Recommendation 2(a)
The law should provide that the intent and knowledge required to prove the offence of ML may be inferred from objective factual circumstances.
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INTERNATIONAL STANDARDS FATF 8, Recommendation 2
KEY ELEMENTS OF LAW
INTERNATIONAL COUNTRY COMPARISONS Most countries have only recently (post-Sept 11) signed or ratified the International Convention for the Suppression of the Financing of Terrorism 1999. Several developed countries have take action but information on developing countries is limited. The following jurisdictions have incorporated these provisions to varying degrees: Hong Kong/China Indonesia (only banking institutions) Malaysia Philippines Singapore S. Korea Thailand Australia Canada Japan New Zealand United Kingdom United States EU: Many countries This is a new requirement which was included in the latest revised FATF 40, issued in June 2003. Therefore, it is likely that only a few jurisdictions have implemented it so far.
The law should also criminalize the financing of terrorism (FT). (This requirement may also be implemented by an amendment of the general criminal law)
FATF 40, Recommendation 2(b)
Criminal liability and/or civil and administrative liability should apply not only to individuals but also to legal persons, i.e., corporations, financial institutions, foundations, partnerships, associations or similar bodies that can establish a permanent customer relationship with a financial institution or otherwise own property. All categories of financial institutions should be subject to the law. FATF 40 defines financial institutions to mean any person or entity which conducts as a business one or more of 13 designated financial activities or operations for or on behalf of a customer.
FATF 40, Glossary
FATF 40, Recommendations 2 (b) and 17
Effective, proportionate and dissuasive sanctions, whether criminal, civil or administrative, should be established for the ML offence, and should apply to both natural and legal persons.
FATF 40, Recommendations 12 and 16
All designated non-financial businesses and professions (i.e., casinos, real estate agents, dealers in precious metals, dealers in precious stones, lawyers, notaries, and other independent legal professionals and accountants, and trust and service company providers) should be covered by the law when engaged in financial transactions.
64
KEY ELEMENTS OF LAW
INTERNATIONAL COUNTRY COMPARISONS
II. FATF 40, Recommendation 3
Freezing, Seizure and Confiscation The following jurisdictions have implemented these provisions to varying degrees: Hong Kong/China Indonesia Malaysia Philippines Singapore S. Korea Thailand Australia Canada Japan New Zealand United Kingdom United States EU: Many countries
The law should authorize the competent law enforcement authorities to: (a) identify, trace and evaluate property which is subject to confiscation; (b) take provisional measures to freeze and seize suspected criminal assets so as to prevent any dealing, transfer or disposal of such property; (c) preserve the States ability to recover property that is subject to confiscation; and (d) take any appropriate investigative measures The freezing, seizure and confiscation measures should extend not only to the actual property laundered (original proceeds of crime) but also to proceeds from or instrumentalities used in the commission of ML offences, and property of corresponding value that directly or indirectly represents the proceeds of crime. In exercising these measures, the rights of bona fide third parties should be protected.
The freezing, seizure and confiscation measures should also extend to terrorist assets.
Information on country compliance not easily available as U.N. Security Council Resolution 1373 was adopted in late 2001, but it is likely that many countries have taken or are taking necessary action as SC Resolution 1373 creates legally binding obligations for all U.N. members. These aspects are being assessed by the UN, FATF, IMF and World Bank.
65
KEY ELEMENTS OF LAW
III.
Financial Intelligence Unit and Law Enforcement As of July 25, 2003, 84 jurisdictions have established FIUs in line with the definition of the Egmont Group of Financial Intelligence Units of the World. These include: Hong Kong/China (JFIU) Indonesia (PPATK, underway) Malaysia (UPW) Philippines (AMLO, underway) Singapore (STRO) S. Korea (KFIO) Thailand (AMLO) Australia (AUSTRAC) Canada (FINTRAC) Japan (JAFIO) New Zealand (FIU, Police) United Kingdom (NCIS) United States (FINCEN) EU: Many countries The above jurisdictions have incorporated provisions in their laws to cover all or most of these requirements.
The law should provide for the establishment of a Financial Intelligence Unit (FIU) to serve as a national center for receiving (and requesting) analysis and disseminating of Suspicious Transactions Reports (STRs) and other information regarding potential ML and FT. The FIU should have access, directly or indirectly, on a timely basis to the financial, administrative and law enforcement information required to properly undertake its functions, including analysis of STRs. Reporting parties should be required to send all STRs to the FIU. The FIU should issue guidelines for identification of complex and unusual transactions or unusual patterns of transactions, and suspicious transactions. The FIU should prescribe the procedures for submission of STRs and other reports by financial institutions and other persons, including the specification of reporting forms. The FIU should be vested with powers to obtain or demand additional documentation or information to assist it in the analysis of reports.. The FIU should have authority to order sanctions or penalties (e.g., fines, suspension of license) against persons or entities that fail to comply with reporting obligations.
66
KEY ELEMENTS OF LAW
The FIU should have authority to disseminate financial information and intelligence to domestic law enforcement authorities and agencies for investigation or action when there are grounds for suspicion of ML or FT. The FIU should be authorized to share financial information and other relevant intelligence with foreign counterpart FIUs, either on its own initiative or upon request. FATF 40, Recommendation 27 The law should clarify and clearly designate the law enforcement authorities which will have responsibility for ML and FT investigations.
See above
Most laws contain provisions, in varying degrees of detail, on these aspects. In the absence of such specific provisions, the police or attorney-general/prosecutors office usually deals with all criminal investigations and prosecutions. Most laws contain provisions, in varying degrees of detail, on these aspects.
Law enforcement agencies, the FIU and other competent authorities should be given the power to identify and trace property that is or may be subject to confiscation or under suspicion of being the proceeds of crime or used for FT. FATF 40, Recommendation 29 Financial regulators or supervisors (e.g., central banks) should have adequate powers to monitor and ensure compliance of the law by financial institutions, including the authority to conduct inspections and compel production of information, and the power to impose administrative sanctions (e.g., fines, suspensions of license)
Most laws contain provisions, in varying degrees of detail, on these aspects.
67
KEY ELEMENTS OF LAW The law should preferably establish inter-agency coordination mechanisms to ensure effective cooperation among the FIU, law enforcement agencies, and financial regulators or supervisors.
INTERNATIONAL COUNTRY COMPARISONS A few jurisdictions have established such mechanisms, e.g.: Philippines, Thailand
IV.
Preventive Measures for Financial Institutions and Others Customer Due Diligence
The following jurisdictions have incorporated provisions on these aspects, in varying degrees of detail, in their laws: Hong Kong China Indonesia Malaysia Singapore S. Korea Thailand Australia Canada Japan New Zealand United Kingdom United States EU: Many countries
A. FATF 40, Recommendation 5
Financial institutions should not keep anonymous accounts or accounts in obviously fictitious names. Financial institutions should implement customer due diligence (CDD) measures, including identifying and verifying the identity of their customers, both individuals and corporate entities. In addition:
Financial institutions should, in relation to politically exposed persons, also apply appropriate risk management systems and approval procedures before establishing business relationships with them. Financial institutions should establish special arrangements for CDD in relation to cross-border correspondent banking.
See above
68
KEY ELEMENTS OF LAW
Financial institutions should maintain, for at least 5 years, all necessary records of financial transactions, both domestic and international, to facilitate reconstruction of transactions and ML and FT investigations. B. Reporting of Suspicious Transactions The laws of the following jurisdictions have provisions on STRs: Hong Kong/China, Indonesia, Japan, Malaysia, Philippines, Singapore, S. Korea, Thailand, Australia, Canada, New Zealand, United Kingdom, United States, many EU countries
FATF 40, Recommendation 13; FATF 8, Recommendation 4
Financial institutions shall report to the FIU promptly (submit STRs) its suspicions of ML or FT activities,
Bank secrecy laws (which are usually found in the laws on financial institutions) should be amended or a specific waiver included to exempt financial institutions, their directors, officers and employees when they submit reports of suspicious, large or unusual financial transactions in good faith to the FIU. The law should include safe harbor provisions granting financial institutions, their directors, officers and employees immunity from criminal or civil liability for reporting suspicious, large or unusual transactions in good faith to the FIU. The law should provide for the maintenance of strict confidentiality in reporting of suspicious, large or unusual financial transactions, and make it an offence for anyone to disclose to third parties that a report has been made (tipping off)
Most jurisdictions have included provisions in their laws waiving bank secrecy laws.
FATF 40, Recommendation 14(b)
Most jurisdictions have included provisions in their laws covering these requirements.
69
KEY ELEMENTS OF LAW
Financial institutions should pay special attention to all complex, unusual large transactions and all unusual patterns of transactions, which have no visible lawful purpose C. Reporting of Large Value Transactions The following jurisdictions have included such a provision in their laws: Hong Kong/China, Indonesia, Malaysia, Philippines, Singapore, S. Korea, Thailand, Australia, Canada, New Zealand, United Kingdom, United States, many EU countries.
FATF 40, Recommendation 19(b) Financial institutions should report to the FIU all domestic and international currency transactions above a fixed amount.
D. Internal Controls and Procedures FATF 40, Recommendation 15 Financial institutions should implement internal controls and procedures to prevent ML and FT, e.g., internal policies, manuals, procedures and controls, ongoing employee training programs, and audits. Financial institutions should establish appropriate compliance management arrangements, including designating a compliance officer at the management level. See below
FATF 40, Recommendation 15 and Interpretative Note
The following jurisdictions have included provisions in their laws, to varying degrees of details, covering some or all of these requirements: Hong Kong/China, Indonesia, Malaysia, Philippines, Singapore, S. Korea, Thailand Australia, Canada, New Zealand, United Kingdom, United States, many EU countries
Financial institutions should ensure compliance with the law by its branches and majority-owned subsidiaries abroad. Financial institutions should not enter into, or continue, relationships with shell banks or with respondent financial institutions that permit their accounts to be used by shell banks.
70
KEY ELEMENTS OF LAW
E. Regulation and Supervision Financial institutions should prevent criminals or their associates from holding or being the beneficial owner of a significant or controlling interest or holding a management function in the financial institutions. All financial institutions, as defined in the FATF 40 Glossary, should be licensed or regulated and appropriately regulated and subject to supervision and oversight for AML and CFT purposes. At a minimum, businesses providing a service of money or value transfer, or of money or currency changing, should be licensed or registered, and subject to AML and CFT laws. Designated non-financial businesses and professions should be subject to regulatory and supervisory means for AML and CFT. FATF 8, Recommendation 8 The law should include provisions to closely monitor the financial activities of non-profit organizations such as charities to ensure that they are not abused for FT purposes. The law should provide for measures to detect and monitor the physical cross-border transport of currency and bearer negotiable instruments. These are new requirements arising from the revision of FATF 40 in June 2003. As such, it is too early to assess the level of compliance with these requirements.
FATF 40, Recommendation 23; FATF 8, Recommendation 6
See above
Most jurisdictions have in place some form of laws or regulations covering this requirement.
71
KEY ELEMENTS OF LAW
V. International Cooperation and Mutual Assistance Countries should rapidly, constructively and effectively provide the widest possible range of mutual legal assistance in relation to money laundering and terrorist financing investigations, prosecutions, and related proceedings. The competent authorities should be authorized to respond to requests for mutual legal assistance, and if consistent with their domestic framework, in response to direct requests from foreign judicial or law enforcement authorities to domestic counterparts.
The laws of several of the jurisdictions mentioned contain provisions meeting these requirements. Some are very detailed and others are brief. Some of these countries rely on bilateral mutual assistance agreements or the principle of reciprocity as a basis for cooperation and assistance.
The competent authorities should, to the greatest extent possible, render mutual legal assistance notwithstanding the absence of dual criminality. There should be authority to take expeditious action in response to requests by foreign countries to identify, freeze, seize and confiscate property laundered, proceeds from money laundering or predicate offences, instrumentalities used in or intended for use in the commission of these offences, or property of corresponding value. There should also be arrangements for coordinating seizure and confiscation proceedings, which may include the sharing of confiscated assets. The law should recognize money laundering as an extraditable offence. The law should include other provisions to facilitate cooperation and mutual assistance with counterpart jurisdictions.
See above
FATF 40, Recommendation 39 FATF 40, Recommendation 40
72
APPENDIX E AML DETAILED COMMENTS
E. Anti-Money Laundering Detailed Comments

DETAILED COMMENTS ON THREE RULES PROMULGATED IN MARCH 2003
(PAGES 73-91)
This is a detailed analysis of three rules promulgated in March 2003 to aid in fighting the practices of money laundering in the PRC. It should be noted that these three legal instruments deal only with banking-type financial institutions falling within the regulatory supervision of the PBC.
(1) Regulation on Anti-Money Laundering for Financial Institutions (2) Administrative Measures for Financial Institutions Governing LargeValue and Suspicious Renminbi Payment Transactions; and (3) Administrative Measures for Financial Institutions Governing LargeValue and Suspicious Foreign Exchange Transactions. General Comments 1. The review indicates that the three legal instruments appear to cover the
territory reasonably well by broadly incorporating most of the applicable international standards and best practices for combating money laundering, particularly those established by the Financial Action Task Force on Money Laundering (FATF) through its Forty Recommendations (FATF 40). However, the Regulation and the two Administrative Measures are very general and brief in their formulation and, therefore, may not provide sufficiently clear and precise guidelines to the staff of the financial institutions in implementing the new rules. Several illustrations of this point will be provided under Specific Comments on the three legal instruments below. 3. A major gap in these three legal instruments is that they fail to contain any
provisions in observance of the FATFs Special Recommendations on Terrorist Financing (FATF 8), as noted in the main report. There is only one reference to terrorist crimes as a predicate offence in Article 3 of the Regulation. This notable omission will almost certainly be picked up in any future international assessment of the PRCs observance of anti-money laundering/combating the financing of terrorism (AML/CFT) standards.
73
4.
It is not entirely clear what the relative legal status of a Regulation (the first legal
instrument) is in contrast to Administrative Measures (the second and third legal instruments). The two Administrative Measures spell out more fully the general requirements or rules under the Regulation. If there is no major difference in legal status, consideration may be given to consolidating the three legal instruments into one Regulation to simplify understanding of the rules by the staff of financial institutions. Otherwise, these staff will have to refer each time to all three legal instruments (not to mention all the other laws, regulations, notices and administrative measures in place) for guidance and full understanding of their various legal obligations. This is likely to create some confusion and uncertainty due to a number of conflicting or inconsistent provisions among the laws, which are discussed below. 5. It is important to note that there are several other laws, regulations, notices and
administrative measures in the PRC touching on or relating to money laundering. Thus, any review of the three PBC legal instruments must be viewed in the broader context of these other laws, regulations, notices and measures.
Specific Comments
I. 6.
REGULATION ON ANTI-MONEY LAUNDERING FOR FINANCIAL INSTITUTIONS Article 1. This Article states that this Regulation is being formulated and
issued pursuant to the Law on the Peoples Bank of China and other relevant laws and administrative regulations including the general criminal laws. It would be desirable to identify the other specific laws referred to (e.g., Articles 191 and 174 of the New Criminal
Law) so that staff of the financial institutions will clearly know the full scope and context
of their legal obligations. This is also important to ensure that, in addition to persons and institutions in the PRC, foreign persons including international organizations and the private sector are also able to understand the references.
74
7.
Article 2.
This Article defines financial institutions in terms only of
banking-type financial institutions. It refers to institutions that are incorporated and engaged in financial business within Chinese territory following approvals in accordance with Chinese law, and includes policy-oriented banks, commercial banks, credit unions, post savings and exchange institutions, finance corporations, trust and investment corporations, financial lease corporations, and foreign-invested financial institutions. 8. By virtue of the definition of financial institutions, non-bank financial
institutions such as insurance companies, securities firms, bureaux de change and money changers, alternative remittance systems (similar to the hawala system in South Asia and the informal Chinese money transfer systems prevalent in several parts of East Asia, which have attracted attention since the September 11, 2001 terrorist attacks) are not covered or targeted by the Regulation. Nor does the Regulation cover or target other entities and persons who may be involved in providing various forms of financial services (e.g., accountants, financial and investment advisers, lawyers, often referred to as gatekeepers) that could potentially constitute the laundering of criminal proceeds. It is appreciated that the PBC does not have jurisdiction or powers to supervise these other categories of persons under the Law on the Peoples Bank of China of 1995. Nevertheless, this gap in coverage raises a serious question about the adequacy of coverage and effectiveness of the PRCs overall anti-money laundering legal regime. 9. To be truly effective, it is essential that the PRCs anti-money laundering laws are
formulated as broadly as possible to capture all financial institutions including nonbank financial institutions (see FATF 40, Recommendations 23-25 and the Glossary which defines financial institutions as any person or entity who conducts as a business one or more of 13 listed activities or operations on behalf of a customer), which includes all other persons or entities (other than banking-type financial institutions) that could be misused for the laundering of criminal proceeds. This gap cannot be addressed by an amendment of the Regulation and Administrative Measures. Therefore, on a more general level, it is important for the PRC to consider broadening the coverage of financial institutions and other persons and entities in the context of the clearly established international standards and trends. For instance, the European Union revised its anti-
75
money laundering directive (Directive 2001/97/EC) to expand significantly the coverage of persons subject to anti-money laundering due diligence from credit and financial institutions to auditors, external accountants and tax advisors, real estate agents, notaries and other independent legal professionals, when they act on behalf of and for their clients in any financial or real estate transaction; dealers in high value goods (such as precious stones and metals) and auctioneers, whenever payment is made in cash in an amount of Euro 15,000 or more; and casinos. 10. Finally, FATF 40 explicitly provides that the customer due diligence and record-
keeping requirements and the suspicious transactions reporting requirements should apply to all designated non-financial businesses and professions (e.g., casinos, real estate agents, dealers in precious metals and stones, lawyers, notaries and other independent legal professionals and accountants) when they engage in financial or cash transactions (see FATF 40, Recommendations 12 and 16). As noted in the main report, the best way to fill the above gaps in coverage and effectiveness of the law is for the PRC Government to seriously consider the promulgation of a new Basic Law Against Money Laundering. 11. Article 3. The list of predicate offences set out here is somewhat at variance
with what is listed in Article 191 of the New Criminal Law, referred to and discussed in the main report. For example, it is not clear what the reference additionally to other crimes means. Also, what crimes are covered by terrorist crimes ? Does it cover only acts of terrorism, or also membership in terrorist organizations and the financing of terrorism, etc? Please see comments in the main report above on the importance of having a more comprehensive listing of predicate offences. 12. In line with the evolving international standards and practice (as now further
confirmed by the revised FATF 40 of June 2003), the predicate offences should be all serious crimes, which term is often defined by reference to the punishment threshold (e.g., one years imprisonment or more) or by a comprehensive list of offences (see FATF 40, Recommendation 1 and the Glossary defining twenty designated categories of offences that should normally be included in the crime of money laundering). Published reports about money laundering in the PRC have listed as important predicate
76
offences: bank fraud, embezzlement and other financial crimes as well as illegal alien smuggling, intellectual property violations, corruption, and tax evasion. 13. In contrast to the repeated references in Article 191 of the New Criminal Law to
various acts of helping to commit the crime of money laundering, Article 3 does not refer to acts of helping or assisting in the commission of the crime. This important element needs to be included. Furthermore, on a more general level, under the New Criminal Law, the PRC may wish to consider having money laundering as covering: persons engaged in assisting any person who is involved in the commission of the predicate offence to evade the legal consequences of his or her actions; the acquisition, possession or use of property; concealing or disguising the true nature and source of illegal gains and proceeds, and also the location, disposition, movement or ownership of property (see, e.g., UN Office on Drug Control and Crime Prevention (ODCCP), Global Programme Against Money Laundering, Model Legislation on Laundering,
Confiscation and International Cooperation in relation to the Proceeds of Crime 1999 (UN Model Law), Article 1.1.1. This is the civil law model. 14. Article 4. This Article is worded in rather general terms even if it is a catch-
all provision that is spelled out more fully later. It would be desirable for the provision to refer first to the legal obligation imposed on financial institutions to strictly implement customer identification or Know Your Customer procedures and report suspicious transactions. In addition, the words and report should be inserted after identify. 15. It would also be appropriate for this provision to require financial institutions to
comply with customer due diligence requirements, including any regulations to be hereafter issued by PBC in accordance with the law, especially because the regulations and due diligence standards are constantly evolving. 16. Article 5. This provision is oddly worded and could be misinterpreted by the
staff of financial institutions. It is not correct to state that such staff shall keep the secrets or maintain confidentiality concerning the anti-money laundering tasks. On the contrary, the customer identification/Know your Customer procedures should be widely publicized and enforced with all customers. Financial institutions must undertake
INTERNATIONAL LAW INSTITUTE 77 FINAL REPORT - 15 DECEMBER 2003
outreach and training within the institution and must transmit large value and suspicious transactions reports to the PBC, SAFE and the law enforcement authorities. Indeed, Article 19 of the Regulation provides that financial institutions shall expand propaganda for anti-money laundering among their clients. What should be treated as strictly confidential is the reporting by financial institutions and their staff of large, unusual and suspicious transactions to the law enforcement or prudential supervision authorities; in other words, tipping off or warning customers or others (such as the media) when information relating to customers suspicious transactions is being reported to the competent authorities is prohibited (see FATF 40, Recommendation 14). 17. Article 6. This Article provides very broadly that financial institutions shall
assist and cooperate with various judicial, administrative, law enforcement, customs, tax bureaus and other departments to crack down on money laundering. This formulation is not precise enough to inform financial institutions, customers, and other interested persons as to what are the laws, regulations and procedures that entitle financial institutions to override financial privacy to cooperate with judicial, administrative and law enforcement organizations. It is also not clear how and when this assistance and cooperation should be provided. More specifically, how does this obligation relate to the obligation to submit reports of large value, unusual and suspicious transactions to the PBC or the SAFE? Requiring financial institutions and their staff to report to and cooperate with/assist multiple institutions is undesirable if (a) confidentiality is to be preserved, and (b) confusion in the role and responsibilities of the various agencies in combating money laundering is to be avoided. Ideally, there should be only one single financial intelligence unit (FIU) to which all suspicious transaction reports will initially be sent. This FIU will then analyze the reports and forward those that warrant further investigation to the relevant authorities (e.g., the police or customs authorities). Presumably, the PBC could serve as the FIU or else a separate FIU could be established through an anti-money laundering agency (e.g., as in Malaysia, the Philippines, Indonesia,
South Korea or Thailand; and in several Western countries).
18.
Article 7.
This Article setting out the functions of the PBC and SAFE is
generally fine in scope but formulated in very general terms, and much is left for later
78
clarification, regulation, or guidelines, e.g., the PBC is expected to establish systems and procedures for monitoring and reporting payments and transactions, including suspicious transactions, pursuant to this provision. (SAFE appears to have some such systems and procedures in place). While the responsibilities of SAFE are set forth, it is not clear how the PBC and SAFE will cooperate when their functions may overlap or interact. For instance, it seems as though PBC has much broader responsibilities than SAFE. 19. Article 8. This Article is very broadly formulated in describing the
obligations of financial institutions: shall establish and improve their internal antimoney laundering mechanisms and report such mechanisms to the PBC. As such, it raises an important question: How will staff of the financial institutions begin to comply with their various obligations under this Regulation if the rules, systems and procedures are not in place at the same time? The rules on customer due diligence should, if possible, be defined and attached to this law so that the financial institutions can clearly know all the rules and comply with them. Ideally, the reporting forms and procedures should be set out in an annex to the Regulation or in subsequent Notices issued pursuant to the Regulation, as has been done by several other countries (e.g., United States, United Kingdom, Australia, Canada, Malaysia, South Korea, Singapore, Thailand, and the Philippines) and Hong Kong. Good examples of reporting forms may be found on the websites of the Hong Kong Monetary Authority, the Monetary Authority of Singapore and FINTRAC Canada. 20. Articles 10-12. These important provisions require financial institutions to strictly
implement customer identification/Know Your Customer procedures in opening accounts and handling deposits and settlements. It would be useful to spell out more fully the detailed requirements for customer due diligence, as recommended by FATF 40, Recommendations 5-12 and the Basle Committee on Banking Supervision, Customer Due Diligence for Banks. Further, it would also be useful for the PBC to include in an annex alternative prescribed Customer Identification/Account Opening Forms to be filled out routinely by all customers (both direct customers individual and corporate and those acting as agents, trustees, or nominees), so as to simplify tasks and make it easier for staff of the financial institutions and their customers to comply with the law. This is
79
particularly important in countries like the PRC where cultural factors and social inhibitions may make it difficult for staff to interrogate their customers. When prescribed forms are required to be completed under the law, the task of implementation becomes easier for staff of the financial institutions and also ensures that full and comprehensive customer identification details are obtained as a matter of course and systematically recorded as required under the law. 21. Article 10. The Article should refer to the relevant regulation or guidance
about verification of client identity or real names (e.g., Rules on Real Name for Opening of Individual Deposit Accounts 2002). Such identification should occur for matters other than just deposits and settlement. For instance, see FATF Interpretative Note of February 14, 2003 on wire transfers regarding the need for the originating intermediary and receiving banks to obtain and keep identification of the persons participating in the transaction. 22. Article 11. The Article requires financial institutions to follow Know Your
Customer procedures in connection with opening deposit accounts and handling settlement for individual clients. It is not clear what is meant by handling settlement for individual clients. The international standard requires financial institutions to identify and verify their customers identity and addresses before opening ordinary accounts or passbooks, taking stocks, bond or other securities into safe custody, granting safe-deposit facilities or engaging in any other business dealings. UN Model Law, Art. 2.2.2 (Identification of customers by credit and financial institutions). 23. International standards also require the identification of casual customers in the
case of any transactions involving a minimal threshold. UN Model Law, Art. 2.2.3. 24. Article 12. It is not clear what is meant by the obligation of financial
institutions, when conducting business operations for unit clients, to require them to provide valid testimonials, documents and information for verification. To avoid misunderstanding, it would be helpful to clarify exactly what kind of documents or information is actually required.
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25.
Articles 13-17. These Articles provide for the reporting of large value transactions
and suspicious fund transactions. The criteria or standards for determining large sum and suspicious transactions are not stipulated in these provisions. However, it is noted that these criteria and standards are set out in the second legal instrument, Administrative Measures for Financial Institutions Governing Large Value and Suspicious Renminbi Payment Transactions: see comments on these aspects under Section III below. 26. In addition to reporting large value transactions, the FATF recommends that
financial institutions pay special attention to all complex, unusual large transactions, and all unusual patterns of transactions, which have no apparent economic or visible lawful purpose. The background and purpose of such transactions should, as far as possible, be examined, the findings established in writing, and be available to help competent authorities and auditors. (see FATF 40, Recommendations 11). These additional types of transactions should, therefore, be included. 27. Articles 13-15. These Articles should clarify more precisely the reporting
requirements, e.g., domestic transactions are reported to the PBC, while foreign exchange transactions are reported to the SAFE as provided in the two Administrative Measures. Further, in view of the strict confidentiality of these reports, it may be undesirable to require financial institutions to report to both the local branches of the PBC and the SAFE, and also to their head offices. As noted earlier, this would increase the risks of breach of confidentiality and tipping off. 28. Article 16. For reasons which have been noted earlier, it is undesirable to
require financial institutions to report suspicious transactions directly to Public Security Bureaus (PSBs), in addition to reporting to the PBC or SAFE. In accordance with established international standards and best practices, the reports should first be submitted only to the PBC or SAFE for analysis and it is they who should then decide whether the report warrants further investigation by the law enforcement authorities. Otherwise, staff of financial institutions might indiscriminately send reports to the PSBs and considerable confusion may follow in the respective roles and responsibilities of the different agencies. It is important to appreciate that the identification of a suspicious
81
transaction is not an easy one as direct proof of criminal activity is usually not presented and staff will be left to draw inferences and interpretations (suspicions) from circumstantial evidence such as the nature, patterns, frequency, and parties involved in financial transactions. 29. Article 17. This Article should clarify that the account information to be
maintained by financial institutions includes all the supporting customer identification documents such as identity certificates (e.g., passport, drivers license, and ID copies), incorporation details for corporate clients, information on principals for agents, and testimonials. The provision should state that (s)uch records must be sufficient to permit reconstruction of individual transactions (including the amounts and types of currency involved if any) so as to provide, if necessary, evidence for prosecution of criminal activity. (see FATF 40, Recommendation 10). 30. Article 18. With respect to the requirement that the PBC or SAFE transfer
suspicious transaction reports to judicial organizations, it would be helpful to identify the judicial organizations. Does this term cover public prosecutors and/or the police authorities or does it refer only to courts? This is not clear. This Article also refers to the Regulations on Transferring Suspected Criminal Cases by Administrative Agencies to the Judicial Departments. Therefore, it would be desirable to include a clarification by reference to that Regulation. 31. Article 19. This is an excellent provision, which provides that the PBC will be
actively involved in directing and organizing training programs for the staff of the financial institutions. This role and support by the PBC is critical to ensure the successful implementation of the new Regulation and Administrative Measures. 32. Article 20-23. The penalties set out in these Articles for violations of important
obligations (such as failing to obtain full customer identification details, failing to report large and suspicious transactions, breaching confidentiality, and failing to maintain records) are very weak. The penalties only include disciplinary warnings, small fines, and disqualification of senior management. These penalties are very minor when judged against the relevant international standards which call for effective, proportionate and
dissuasive sanctions (FATF 40, Recommendations 2 and 17), by comparison to those stipulated in the New Criminal Law (which include imprisonment), and those generally stipulated in the anti-money laundering laws of many other jurisditions, which also usually provide for the criminal prosecution of individuals and corporations, much larger fines, imprisonment, and revocation of business licenses. (see, e.g., Malaysia, Indonesia, the Philippines, South Korea, Thailand, Hong Kong and most Western countries.) Stronger penalties are necessary to emphasize the seriousness of the money laundering crime and to deter it. The range of punishments does not meet the recommended penalties of the UN Model Law, Title IV, Chapter II. 33. On a more general level, in connection with the range of punishments, the PRC
may want to consider prescribing penalties for other related offences, which would criminalize various offences relating to anti-money laundering due diligence: see the UN Model Law, Article 4.2.5 (Penalties for other offenses). The PRC may also want to consider having a provision on aggravating circumstances with respect to criminal penalties (e.g., perpetrating a money laundering offence as part of the activities of a criminal organization or in the pursuit of a trade or occupation): see the UN Model Law, Article 4.2.6. In addition, the PRC may want to consider a provision on mitigating circumstances: see the UN Model Law Article 4.2.7. 34. In addition to the above comments on the specific provisions of the Regulation,
noted below are a numbers of gaps or omissions in the Regulation which will need to be considered by the PBC and filled unless these aspects are already covered by other laws or regulations in China. This could be done either by adopting suitable amendments to the Regulation or through the issuance of Notices or clarifications to the financial institutions amplifying on the general provisions, whichever is legally permissible or appropriate in each case: The reporting by financial institutions and their staff of large, unusual and suspicious transactions to the authorities should be exempt from the application of bank secrecy rules as set out in the Law on Commercial Banks, Articles 29 and 30 (see FATF 40, Recommendation 14). To do this, the Law
83
on Commercial Banks (which is a higher-level Basic Law) will first need to be amended, and then the Regulation should refer to this exemption. The Regulation cannot legally grant an exemption from the provisions of a Basic Law. The Regulation lacks any detailed provisions for the freezing, seizure or confiscation of the criminal proceeds involved in money laundering although there is a brief reference to this. It is noted that these aspects are, however, covered to some degree by other laws such as the New Criminal Law, Article 191 and 174 (see FATF 40, Recommendation 3). See also the detailed provisions on confiscation set out in the UN Model Law, Title IV, Articles 4.2.9 to 4.2.13. The Regulation does not appear to address the FATFs Special Recommendations on Terrorist Financing (FATF 8), dated October 30, 2001, which deal with a number of additional requirements to combat terrorism and terrorist financing, which frequently involves money laundering. These include closer monitoring of wire transfers, reporting of suspicious transactions related to terrorism, registration and licensing of alternative remittance systems, and monitoring of non-profit organizations involved in financial activities (see FATF 8). Most of these requirements are also set out in UN Security Council Resolution 1373 of September 28, 2001, which is legally binding on all UN members. 35. In addition, neither this Regulation nor the two Administrative Measures provide
in any way for international cooperation and mutual assistance among countries with respect to AML. In this regard, a key element of anti-money laundering regulations includes: administrative cooperation, including exchange of general information and exchange of information relating to suspicious transactions; and other forms of cooperation, including the basis and means for cooperation in confiscation, mutual assistance and extradition, and focus on improved mutual assistance on money laundering issues (FATF 40, Recommendations 35-40). This aspect is critical in view of the
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transnational characteristics of the money laundering crime, which frequently involves the rapid movement of money or value between various jurisdictions. 36. None of the three legal instruments includes provisions on integrity standards for
officials of financial institutions, which are designed to prevent criminals from holding or being the beneficial owner of a significant or controlling interest or holding a management function in a financial institution (see FATF 40, Recommendation 23). Directors and senior management of financial institutions subject to prudential supervision should be evaluated as to expertise and integrity. Criteria for qualification should include: (i) skills and experience in relevant financial operations commensurate with the intended activities of the financial institution, and (ii) no record of criminal activities or adverse regulatory judgments that would make the person unfit to be a director or senior manager of that institution. It is important for the PRC and the PBC to be aware that this important aspect of integrity standards is now a key element of the IMF-World Bank-FATF Methodology for Assessing Compliance with Anti-Money Laundering and Combating the Financing of Terrorism (AML/CF) Standard. 37. The three legal instruments do not seem to have adequate measures to prevent
unlawful use of entities identified as vulnerable to use as conduits for laundering criminal proceeds or financing terrorism, such as shell banks or charitable or not-for-profit organizations (see FATF 40, Recommendation 18).
II.
ADMINISTRATIVE MEASURES
FOR
FINANCIAL INSTITUTIONS GOVERNING
LARGE VALUE AND SUSPICIOUS REBMINBI PAYMENT TRANSACTIONS 38. These Measures appear to have been issued pursuant to and in conjunction with
the first Regulation as both legal instruments were adopted on the same day (September 17, 2002) by the PBC. The Measures amplify on the general provisions of the Regulation dealing with the reporting of large value and suspicious transactions. They deal only with payment transactions denominated in Renminbi. Foreign exchange transactions including international wire transfers are covered by the second
85
Administrative Measures, which are administered separately by SAFE, and discussed under Section IV below. 39. Comments on the related or corresponding provisions in the Regulation should be
read as applying to these Measures, to the extent relevant, and as such will not be repeated here. On the whole, these Measures appear to be reasonably comprehensive and cover the territory quite well although it remains unclear why these provisions could not have been incorporated in the body of the Regulation itself, so that there is a single legal regulation. As noted in the earlier section, a related question is whether the Administrative Measures carry the same legal force and effect as the Regulation. 40. Article 2. It is not clear what the term payment transactions covers or what
it does not cover. Does the term exclude other financial transactions that do not constitute payment transactions, such as a simple funds transfer that is not related to a purchase or invoice for goods or services? If it does, it would need to be clarified what other regulations or measures govern those other financial transactions. 41. The scope of transactions relating to funds settlement also requires
clarification. 42. 43. Article 4-5. These Articles are very brief and should be more fully spelled out.
Suspicious payment transaction is defined as an unusual Renminbi payment
transaction with respect to transactions amount, frequency, flow direction, usage, and nature. If PBC or SAFE has the authority to issue further notices or regulations on suspicious activity reports, it would be useful to refer to the same here. 44. Article 6. Article 6 of this Administrative Measure is similar to the
provisions of Article 6 of the Administrative Measures for Financial Institutions Governing Large Value and Suspicious Foreign Exchange Transactions and Article 8 of the Regulation. However, there are differences, and it is unclear why. It seems that more uniformity could and should exist. For instance, Article 8 of the Regulation requires financial institutions to establish and perfect their internal controls on anti-
86
money laundering and submit the same to the PBC. Article 9 of the Regulation also requires that they establish a specific department for anti-money laundering or designate their internal departments to assume the responsibilities of anti-money laundering equipped with necessary administrative and technical personnel. Article 6 of this Administrative Measure speaks of establishing a specific position of anti-money laundering and designate specific staff to be in charge of recording, analyzing and reporting large sum of and suspicious payment transactions. 45. The above provisions need to be streamlined and made consistent with each other.
In this connection, all the articles should conform to the provisions of FATF 40, Recommendation 5 (and the related Interpretative Note), including the requirement for the designation of a compliance officer at the management level, adequate screening procedures to ensure high standards when hiring employees, an ongoing employee training program, and an audit function to test the system. These seem lacking in the three above-mentioned articles. 46. Article 7. This Article is unclear in its definition of large value transactions.
Category (1) refers to transactions between corporate or juristic entities, while category (3) refers to transactions between individuals and between individuals and unit bank settlement accounts (what does this cover?). Also, it is not clear who the parties to the transactions are under category (2). This may be clarified. 47. Article 8. The list of examples given here of suspicious transactions is quite
good and reasonably comprehensive. However, it is suggested that the PBC may wish to look at the longer list of examples set out in Guideline No. 3.3 on Prevention of Money Laundering (Annex 5) issued by the Hong Kong Monetary Authority under Section 7(3) of its Banking Ordinance. In addition, financial transactions with financial institutions in countries or territories that are the subject of sanctions by FATF members, countries known or suspected to be involved in terrorist activities or associated with terrorists, and countries or territories known or suspected to be a haven for shell banks and offshore trusts and business entities should also be closely scrutinized for suspicious criminal
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activity. Under item (11), the listing of crimes (drug trafficking, smuggling and terrorism) seems too narrow, for reasons that have been noted earlier under the Regulation. 48. To the list of examples should be added business relationships and transactions
with persons, including companies and financial institutions, from countries which do not or insufficiently apply the FATF 40 Recommendations. In addition, a suspicious payment transaction should include transactions which have no apparent economic or visible lawful purpose. (FATF 40, Recommendation 21). 49. Finally, the offences criminalized under the UN Convention Against
Transnational Organized Crime 2000 (the Palermo Convention) should also be included, as the PRC has signed and recently ratified this Convention. 50. Articles 9-11. It would be useful to provide financial institutions and their staff
with more specific guidelines, procedures and reporting forms (including particularly prescribed Reporting Forms for Suspicious Payment Transactions, referred to in Article 11) to facilitate their compliance with the obligations under the Regulation and the Measure. The approach of providing prescribed forms for reporting would greatly facilitate the work of staff in the financial institutions in complying with the new Regulation and Administrative Measures. This approach has been adopted by many other jurisdictions, both in developed and developing countries, under their anti-money laundering laws and regulations (e.g., United States, United Kingdom, Canada, Australia,
New Zealand, Singapore, the Philippines, Thailand, Malaysia, South Korea and Hong Kong.)
51.
It will be necessary to expand this provision to reflect more fully the extensive
customer due diligence requirements for financial institutions set out in FATF 40, Recommendations 5 to 12. Article 10 seems to comply only with the requirements for verification of identity in FATF 40, Recommendation 5. Guidance may also be sought from the Basel Committee of Banking Supervision, Customer Due Diligence for Banks. 52. Article 13. In line with Article 17 of the Regulation, this article should
stipulate that the records should be maintained for at least five years, and also be
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sufficient to permit reconstruction of individual transactions, if necessary, so as to provide evidence for prosecution of criminal activity (see FATF 40, Recommendation 10). 53. Article 14-15. Article 14 provides that each financial institution shall establish its
own internal administrative system and operational procedures concerning payment transactions reporting, while Article 15 seems to suggest linkage of such reporting to relevant systems (presumably a central monitoring system administered by the PBC) for monitoring payment transactions. If this reading of Article 15 is correct and also if PBC is to effectively monitor reporting of large value and suspicious transactions, it would seem highly desirable for the PBC to closely prescribe the systems, procedures and reporting formats for the guidance of financial institutions and their staff, thereby saving valuable time and effort in investigating reports of suspicious transactions. 54. Article 15. This article should describe fully how a financial institution must
report large values of cash collections and payments and suspicious payment transactions. 55. Articles 16-20. The provisions of these Articles are rather complex, duplicative
and therefore somewhat confusing. It is not clear why financial institutions and their staff are being required to submit multiple reports to so many different agencies, at so many different levels and locations, e.g., the PBC head office, the PBC branches (local, provincial capital, and prefectural branches, etc.), operational administrative department (of which agency?), and local public security department. A major concern is: How will the confidentiality of the reports he safeguarded with so many agencies and their staff being involved? There is a serious risk of breach of confidentiality under this multiple reporting system. As noted earlier, there should be a single line of reporting to a central FIU. 56. Article 23. The penalties for non-compliance with the customer identification
obligation are very weak: warning, fines ranging from Renminbi 1,000-5,000; and, if the case is serious (serious is not defined), disqualification of senior management. The penalties should be much higher for violations of this important obligation. In several other countries, criminal penalties including imprisonment, higher fines and revocation of
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business licences are provided for similar violations. As noted earlier, FATF 40 calls for effective, proportionate and dissuasive sanctions. (FATF 40, Recommendation 2 and 17). 57. Article 23-26. The penalties for non-compliance with other obligations, including
failures to report suspicious transactions, breach of confidentiality and failure to maintain records, are also very weak: warning, fine up to Renminbi 30,000, termination or suspension of business, and disqualification of senior management. Criminal penalties such as imprisonment, which are common for such offences in several other countries, are not provided for in the Regulation or this Measure even though Article 191 of the New Criminal Law provides additional penalties of imprisonment and higher fines.
III.
ADMINISTRATIVE MEASURES
FOR
FINANCIAL INSTITUTIONS GOVERNING
LARGE VALUE AND SUSPICIOUS FOREIGN EXCHANGE TRANSACTIONS 58. These Administrative Measures are very similar to the first Administrative
Measures Governing Large Value and Suspicious Renminbi Payment Transactions. As such, many of the comments made earlier on the first Administrative Measures apply equally to these second Administrative Measures. 59. Article 2. The definition of financial institutions engaged in foreign
exchange business is not clear. For example, does this definition include some or all of the financial institutions defined in Article 2 of the Regulation or do they refer to a different group of financial institutions? 60. Further, for the purpose of ensuring efficiency and better coordination and
analysis of reports, it would be highly desirable if a single central FIU were to receive all large value and suspicious transaction reports rather than dividing the same between the PBC and SAFE. This problem will become more serious when CSRC and CIRC eventually establish their own reporting systems. Such centralization allows for better specialization, economy, effectiveness, and uniformity of implementation, and is called for by international standards. FATF 40, Recommendation 26 calls on countries to establish a FIU that serves as a national center for the receiving (and, as permitted,
90
requesting), analysis and dissemination of STR and other information regarding money laundering or terrorist financing. 61. Article 5. In line with Article 17 of the Regulation, this Article should also
provide that records are maintained for at least five years and must be sufficient to permit reconstruction of individual transactions (including the amounts and types of currency involved if any) so as to provide, if necessary, evidence for prosecution of criminal activity (FATF 40, Recommendation 10). 62. Article 14. The reporting requirements set out in this article involving head It suggests multiple
offices, branches, sub-branches and superior offices at different local levels (e.g., provincial capital and municipality) are somewhat confusing. earlier. 63. Article 15. As commented earlier, why does a financial institution have to reporting arrangements which may compromise confidentiality of reports, a risk noted
report a suspicious transaction needing immediate investigation to the local public security department rather than to PBC/SAFE (national FIU)? For reasons noted earlier, such reports should be made only to one FIU. 64. Article 17. It appears that multiple persons and entities will be receiving and
transmitting suspicious transaction reports (e.g., 4 or 5). The risk of so many persons or entities handling SARs is the potential to compromise the confidentiality of such reports and to sacrifice of speed of reporting and to delay and complicate coordinated action in response to such reports. (see comment under Article 2 above) 65. Article 17-18. As noted in the earlier Sections, these penalties are too weak and
inconsistent both with the stipulations of the New Criminal Law and the relevant FATF Recommendations (see FATF 40, Recommendations 2 and 17). 66. Articles 22-27. The penalties are quite low and do not meet minimal international
standards. (see FATF 40, Recommendation 2 and 17; and UN Model Law, Title IV, Chapter II).
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APPENDIX F FINANCIAL CONGLOMERATES SECTION 1
F. Financial Conglomerates Supporting Discussion and Comparisons

(PAGES 93-206)
SECTIONS IN THIS APPENDIX 1. Financial Laws in China 2. Joint Forum on Financial Conglomerates 3. International Comparison of Financial Conglomerate Laws 4. International Comparison of Inter-Agency Cooperation 5. Organizational Structure of the Joint Committee 6. EU Financial Conglomerates 7. Advantages and Disadvantages of Single Regulators in Institutional Reform 8. UK Financial Services and Markets 93 103 122 173 193 194 201 202
SECTION 1 FINANCIAL LAWS IN CHINA The main financial laws are revised Central Bank, Commercial Banking, Securities and Insurance Laws which were adopted in 1995 (banking and insurance) and 1998 (securities).1 Financial reform began with the initiatives announced in 1978.2 The People's Bank of China was appointed the central bank in 1984 although the central bank law was not enacted until 1995.3 This provided for the PBC to be responsible for the regulation and administration of the financial services industry under the guidance of the State Council (article 2). PBC was given power to examine and approve the establishment, modification and termination of financial institutions, supervise, examine and audith deposits, loans, settlement and nonperforming debts and to inspect and sanction financial irregularities. These supervisory powers were subsequently transferred to the China Banking Regulatory Commission (CBRC) in March 2003. Securities markets are overseen by the China Securities Regulatory Commission (CSRC) which was created in 1998 through the merger of the earlier State Council Securities
See Law of the People's Republic of China on Commercial Banks of 10 May 1995; Securities Law of the People's Republic of China of 29 December 1998; and Insurance Law of the People's Republic of China of 30 June 1995. Law of the People's Bank of China of 18 March 1995.
2 3
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Commission (SCSC) and the original China Securities Regulatory Commission established in 1992. Insurance is regulated by the China Insurance Regulatory Commission (CIRC) which was set up in 1998. This took over responsibility from the PBC which had earlier assumed control from the People's Insurance Company of China (PICC) in 1995.
(a)
Banking Regulation Banking regulation is now effected under the Commercial Banking Law of 1 July 1995.
This is now administered by the CBRC. The CBRC supervises the commercial banks, the city commercial banks and the housing savings bank.4 The Commercial Banking Law sets out its objectives5 and defines commercial banks as those enterprise legal persons established to absorb (accept) public deposits, issue loans, arrange settlement of accounts and engage in other businesses as provided for under the Law and the Company Law of the People's Republic of China.6 Commercial banks may conduct thirteen defined activities.7 Permitted business scope is to be set out in the articles of association of the banks and reported to the PBC. Commercial banks must work under the general principles of efficiency, safety and liquidity (fluid) with full autonomy and full responsibility for their risks, profits and losses and
4
6 7
The commercial banks consist of the four state-owned banks - the BOC, ICBC, CCB and ABC - and the shareholding commercial banks and urban commercial banks. Urban commercial banks and rural co-operative banks were to be created from the earlier urban credit unions and rural credit unions under the Reform of Financial System proposals although this was never complete. By 2000, there were approximately 37,624 rural credit unions, 2,474 country federations of rural credit unions, 66 city federations of rural credit unions and 4 provincial federations of rural credit unions. These were originally created during the early 1950s as co-operative financial institutions representing the interests of commune members. Urban credit unions were created during the late-1970s. They were established by city residents, self-employed businessmen and small medium-size enterprises to serve small undertakings and individual customers in urban areas. Many of these were subsequently transformed into city co-operative banks and then into city commercial banks. [See Changyuan Lin, 'Financial Conglomerates in China' (University of London, unpublished, February 2003), Part II. The purpose of the Commercial Bank Law is to protect the legal rights and interests of the commercial banks, depositors and other clients, standardise the behaviour of the commercial banks, improve the quality of loan assets, strengthen their supervision and management and thereby ensure the sound and stable operations of the banks, safeguard the financial order and promote the growth of a socialist market economy (article 1). Company Law of the People's Republic of China of 29 December 1993. See tables [4]. Commercial banks may have the following businesses in part or in whole: 1) absorb (accept) public deposits; 2) issue short-term, medium-term and long-term loans; 3) arrange settlement of both domestic and overseas accounts; 4) handle the discount of negotiable instruments; 5) issue financial bonds; 6) issue cash and sell government bonds as agents; 7) buy and sell government bonds; 8) conduct inter-bank lending and borrowing; 9) buy and sell as principal (per se) or as agents for an exchange; 10) provide credit cards services and guarantees; 11) handle receipts and payments and
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self-restraint (article 4). They must also act with equality, voluntarily, fairly, faithfully and credibly in their relations with clients (article 5). They must protect the legal rights and interests of the depositors against interference (encroachment) by any unit or individual (article 6). They must make reliable credibility checks on borrows in issuing loans (proper credit assessment) with full recovery of principal and interest being protected by law (article 7). Commercial banks are also generally required to act in accordance with all relevant laws and regulations, comply with relevant competition principles and accept the supervision and administration of the PBC (soon to be amended to reflect the new role of the CBRC).8 The provisions concerning the establishment and organization of commercial banks are set out in Chapter 2 of the Law. Minimum capital requirements are imposed of $125 million (RMB 1 billion). 9 The bank's license is to be registered with the State Administration for Industry and Commerce (articles 16 and 21 now the Ministry of Commerce). Banks must establish boards of supervisors made up of representatives of the PBC, relevant government departments and specialist and representatives of bank employees (article 18). Major changes in the name, capital and operation of the bank must be reported (article 24). Usual prohibitions are imposed on management appointments (article 27) with approval being required for any purchase of more than 10% of the shares of the bank (article 28). The Commercial Banking Law contains further provisions clarifying the relationship between the bank and its depositors. General deposit principles are outlined (article 29), client confidentiality (article 30), interest rate provision (article 31), bank reserves (article 32) and repayment of principal and interest (article 33). Further provisions apply with regard to the granting of loans and other bank business (articles 34-53). Banks must, in particular, maintain sufficient assets and liabilities (article 39).10 Additional provisions are imposed with regard to finance and accounting (Chapter 5), supervision and management (Chapter 6), takeovers and termination (Chapter 7) and legal
insurance business as agents; 12) provide safe custody (boxes) and 13) undertake any other business approved by the PBC (article 3). Articles 8, 9 and 10. The minimum or urban co-operative banks is $12.5 million (RMB 0.1 billion) and for rural co-operative commercial banks $6.25 million (RMB 50 million) (article 13). Five specific ratio requirements are imposed: 1) a capital sufficiency ratio of, at least, 8%; a ratio between the balance of loans and the balance of deposits of 35%; a ratio between the balance of circulating assets and the balance of circulating liabilities of 25%; a ratio of the balance of the loans of one borrower and the capital of the bank of 10%; and any other directions of the PBC governing such ratios.
8 9
10
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liabilities (Chapter 8). The PBC (presumably now to be CBRC) may, in particular, assume control (take-over) a bank where a credibility crisis may have a serious effect on the interests of depositors (article 64). The purpose is to protect the interests of depositors and restore the normal operation of the bank. Banks may also terminate on a voluntary basis (article 69) or where its license has been revoked (article 70) or it cannot pay its debts (article 71). A series of fines and criminal penalties are also imposed in addition to compensation where loss has otherwise been suffered by depositors or other creditors.
(b)
Securities Law The Securities Law was adopted on 29 December 1998. Two national stock exchanges
had been opened in 1990 with the Shanghai Stock Exchange and in 1991 with the Shenzhen Stock Exchange. The State Council Securities Commission (SCSC) and the China Securities Regulatory Commission (CSRC) were then set up in October 1992. The SCSC was responsible for market regulation and the CSRC with supervising the securities markets. These agencies were then merged into the current CRSC in 1998. The functions of the CSRC are to supervise securities and futures business, stock and futures markets, listed companies, fund management companies, securities and futures investment consulting firms and other intermediaries in the securities and futures business as well as foreign firms registered within China.11 The purpose of the Securities Law is to standardise the issuing and trading of securities, protect the lawful rights and interests of investors, safeguard the economic order and public interests of society and promote the development of a socialist market economy (article 1).12 The Law applies to the issuing and trading in China of shares, corporate bonds and other securities that are lawfully recognised by the State Council (article 2). Securities are to be issued and traded on an open, fair and equitable basis (article 3) with relevant parties having legal status. Fraudulent and insider trading and manipulation of markets is prohibited (article 5). The Securities Law provides, in particular, that securities business is to be engaged in and administered separately from banking business, trust business and insurance business (article 6). Securities companies must be established separately from banks, trust companies and insurance companies. (This separation is supported by the requirement that the flow of bank funds into the
11
See generally http://csrc.gov.cn.
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stock market unless otherwise permitted by regulation is prohibited (article 133). This will require that securities companies conduct their brokerage and dealing business on separate accounts. It is understood that this strict separation has been criticised as banks and securities firms are anxious to have more freedom with regard to the application of their funds.13 Strict separation and accounting requirements are also imposed to protect investor interests.14) The Law also provides for the establishment of the securities regulatory authority (article 7) and a Securities Industry Association (article 8). The authority is also given power to act in connection with stock exchanges, securities companies, securities registration and clearing institutions as well as the securities regulatory authority (article 9). The Law contains separate provisions with regard to the issuing of securities (Chapter II), the trading of securities (Chapter III), the takeover of listed companies (Chapter IV), stock exchanges (Chapter V), securities companies (Chapter VI), securities registration and clearing institutions (Chapter VII), securities trading service organisations (Chapter VIII) with further provisions concerning the Securities Industries Association (Chapter IX) and the Securities Regulatory Authority (Chapter X). Additional provisions are also imposed concerning legal liability (Chapter XI) and supplementary matters (Chapter XII). With regard to the CSRC, securities markets are to be regulated according to the law, to maintain order of the securities markets and to ensure the lawful operation of the same (article 166). Statutory functions of the CSRC are specified (article 167) and necessary powers (article 168). Relevant authorities are required to produce relevant identity papers and maintain confidentiality in their actions (article 169) and work faithfully, impartially and honestly (article 170). Legal and natural persons are required to co-operate in inspections and investigations (article 171). All rules and regulations are to be published (article 172). Any irregularities are to be passed to judicial authorities for investigation (article 173). CSRC staff are not entitled to hold concurrent positions with regulated institutions (article 174).
12 13 14
[See Table 2.] For comment see, Lin, 'Financial Conglomerates in China', p. 35 and n. 63. Separate securities and cash accounts are to be maintained for clients, instruction records are to be kept and agency transactions conducted in accordance with the relevant rules and regulations (articles 138, 139 and 140). Securities firms must not finance clients' transactions through the provision of securities (article 141) and no profit commitments may be given (article 143). Private instructions may not be accepted (article 144).
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(c)
Insurance Regulation Insurance business is regulated under the Insurance Law of 30 June 1995. This provides
for the regulation of the industry by a 'financial supervision and regulation department' which was subsequently set up as the CIRC in 1998. The PICC had formerly been responsible for overseeing the market although responsibility was then assumed by the PBC in 1995 until the establishment of the CIRC in 1998. The law is designed to standardise insurance activities, protect the legitimate rights and interests of parties, strengthen the supervision and administration of the insurance industry and promote its healthy development (article 1). Insurance refers to the act of payment of premiums by insurance to insurers and the responsibility of the insurers to provide indemnity to the insured persons in cases of loss to property caused by specific contingencies or risks according to the terms agreed (article 2). The Insurance Law contains general provisions including its objectives and definitions (Chapter I), specific requirements on the content of insurance contracts (Chapter II), insurance companies (Chapter III), insurance operational rules (Chapter IV), supervision and administration of the industry (Chapter V), insurance agents and insurance brokers (Chapter VI), penalties (Chapter VII) and certain supplementary provisions and certain supplementary provision (Chapter VIII). Separate Regulations were adopted in 2000 15 with more recent amendments being enacted in October 2002 as part of the WTO accession. Commercial insurance may generally only be conducted by insurance companies (article 6) which are either joint stock companies or wholly state-owned enterprises (article 70). Insurance companies may not use funds to set up any security operation, organisation or enterprise (article 105) with the application of funds being restricted to bank deposits, the purchase of government bonds, financial bonds or other instruments permitted by the State Council. Sector and life and non-life segregation is also supported by the 2000 Regulation of Insurance Companies (article 6).
15
Regulation of Insurance Companies (January 2000).
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Insurance companies must be approved by the CIRC (article 71). requirements must be complied with foreign firm applicants.17
Minimum
documentation must be provided (article 72) and minimum capital held (article 73).16 Additional
Insurance companies are generally required to deposit 20% of their capital with a designated bank (article 79) and shall have a minimum payment ability compatible with the size of its business operations (article 98). The insurance company shall set aside various kinds of liability reserve (article 94) as well as an outstanding loss reserve (article 94), an accumulation reserve fund (article 96) and an insurance guaranty fund (article 97).18 The difference between assets and liabilities must not be less than the amounts prescribed by the CIRC. If this is less, the capital funds must be set aside to make up the deficit (article 98). The CIRC has the right to confirm operations, financial condition and the maintenance of funds and to request reports and documentation as appropriate (article 109). If the insurance company fails to make provision for the required reserves or suitable re-insurance or otherwise commits a serious violation, the CIRC shall order the company to take appropriate corrective action. This may include drawing or carrying down necessary reserves, arranging appropriate reinsurance, remedying the violation or making management or shareholder changes as directive (article 110). If the insurance company fails to do so, the CIRC may appoint external managers to assume responsibility for the running of the firm (article 111). The appointees will run (overhaul) the business as appropriate (article 112). Normal business operations will continue although specific directions may be given by the CIRC (article 113). The external administration or management (overhaul) will end once normal business operations have been restored and a report has been filed (article 114). Where the insurance company has breached the terms of the Insurance Law and jeopardised the public interests with the financial stability of the company being or having been seriously threatened, the CIRC may take over the company (article 115). The purpose of this
16
17
18
National companies must have a minimum paid-up capital of $62.5 million (RMB 500 million) and regional insurance companies $25 million (RMB 200 million). An additional $6.25 must also be held for each subsidiary up to $187.5 million and total (RMB 1.5 billion) for national insurance companies and $62.5 million (RMB 500 million) for regional insurance companies. Regulation of Insurance Companies, article 13. See Regulatory Rules on Foreign Insurance Companies of 30 November 2001. A minimum capital requirement of $25 million is required. Such firms must also have a 30 year trading history, have gross assets of not less than $5 billion, be under the effective supervision of proper authorities in their home territory and comply with relevant liquidity requirements or other obligations imposed by their home territory or as prescribed by the CIRC. Operational provisions are set out in the Regulation of Insurance Companies with regard to the funds to be maintained.
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assumption of control is to adopt necessary measures to protect the interests of insured parties and to restore normal operations of the company. The composition of the body appointed to assume control (takeover) the company will be set out in the announced by the CIRC (article 116). Appointments may be extended but not for a period of over two years (article 117). If the operations of the company have been restored by the end of the designated period, the procedure will be terminated (article 118). If the company has insufficient assets to cover its debts, the CIRC may apply to the People's Court to have the company declared bankrupt (article 118).
(d)
Company Law Legal entities are subject to the Company Law of the People's Republic of China of 29
December 1993. This contains certain general provisions (Chapter 1). The law is adopted in conformity with the Constitution to establish a modern enterprise system, standardise the organisation and operation of companies, protect the legitimate rights and interests of companies, shareholders and creditors and maintain the socialist economic order and promote the development of a socialist market economy (article 1). The term 'company' refers to a limited liability company or a joint stock limited company set up within the territory of the PRC (article 2). Limited liabilities companies and joint stock limited companies are legal entities (article 3). Shareholders have rights to enjoy capital gains, participate in major policy decisions and appoint managers (article 4). Companies shall operate independently and be responsible for their own profits and losses (article 5). Companies shall institute an internal management system with a clear division of power and responsibility, an experienced management and a combined mechanism of incentives and restrictions (article 6). SOEs may transfer to company status. For this purpose they must adjust their original operational mechanisms, draw up an inventory of own assets, define their property rights, clear outstanding credits and debts, appraise assets and establish a standard internal organisation set up in accordance with the laws and administrative decrees concerned (article 7). Limited liability and joint stock limited companies can only register once they have complied with the provisions set out in the Company Law (article 8). Companies must confirm that they are either 'limited liability' or 'joint stock' companies in their names (article 9). Companies must confirm the location of their head office and its address (article 10). Companies must have appropriately
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formulated articles of association that bind the company, its shareholders, directors, supervisors and managers (article 11). Companies may invest in other limited liabilities companies or joint stock companies (article 12). Companies may set up branches without separate legal identity (article 13). In conducting their business operations, companies must abide by the law, observe business ethics, promote socialist culture and ethics and accept the supervision of the Government and public (article 14). Companies must protect the legitimate rights and interests of the their staff and workers, strengthen labour protection and ensure safe production (article 15). Staff will organise a trade union in accordance with the law (article 16). Party organisations will carry out their activities in accordance with the Constitution (article 17). The law also applies to limited liability companies established by foreign investment except as otherwise provided by laws concerning Sino-foreign joint equity ventures, Sino-foreign joint cooperative ventures and foreign enterprises (article 18). The Law contains further specific provision concerning the establishment and organisation of companies (Chapter III) and the issue and transfer of shares (Chapter IV) and corporate bonds (Chapter V). Additional provision is included with regard to financial and accounting matters (Chapter VI), mergers and divisions (Chapter VII), bankruptcy, dissolution and liquidation (Chapter VIII), branches of foreign companies (Chapter IX), liability (Chapter X) and supplementary provisions (Chapter XI).
(e)
Civil Procedure Civil procedure within China is generally determined in accordance with the Civil
Procedure Law of the People's Republic of China of 9 April 1991. The purpose of the Law is to protect the exercise of the litigation rights of parties, ensure that the People's Courts ascertain facts, distinguish right from wrong, apply the law correctly, try civil cases promptly, affirm the rights and obligations in civil affairs, impose sanctions for civil wrongs, protect the lawful rights and interests of parties, educate citizens to abide voluntarily with the law, maintain the social and economic order and guarantee the smooth progress of the socialist construction (article 2). The provisions of the Law apply to civil law suits concerning disputes over the status of property and
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persons amongst citizens, legal persons or other organisations respectively and mutually between citizens, legal person and other organisations (article 3). All persons engaging in civil law suits within the territory of China must abide by the law (article 4). Foreign nationals, stateless persons, foreign enterprises and organisations that institute or respond to prosecutions in the People's Courts shall have the same litigation rights and obligations and citizens, legal persons and other organisations of the People's Republic of China (article 5). The People's Court shall exercise judicial authority with regard to civil cases (article 6). Civil cases will be tried independently in accordance with the law and shall not be subject to interference by any administrative organ, public organisation or individual. In conducting civil proceedings, the People's Courts must base themselves on facts and take the law as the relevant standard (article 7). Parties to a civil law suit shall have equal rights (article 8). Citizens of all nationalities shall have the right to use their native spoken and written languages in civil proceedings (article 11). Parties shall have the right to engage in argument (article 12). State organs, publication organisations, enterprises or institutions may support injured parties to initiate legal action (article 15). (article 17). The Law contains further provision with regard to jurisdiction (Chapter II), trial (Chapter III), withdrawal (Chapter IV), parties (Chapter V), evidence (Chapter VI), time periods and service (Chapter VII), consolidation (Chapter VIII), property preservation and preliminary execution (Chapter IX), compulsory measures (Chapter X) and costs (Chapter XI). The Law contains separate provision for trial procedures (Part 2) with separate provision concerning ordinary procedures at first instances (Chapter XII), summary procedures (Chapter XIII), second instance (Chapter XIV) and special procedures (Chapter XV). Additional provisions are included with regard to trial supervision (Chapter XVI), summary procedures for recovering debts (Chapter XVII), public invitations to assert claims (Chapter XVIII) and enterprise bankruptcy (Chapter XIX). Part 3 details execution procedures with special provisions for civil procedures involving foreign interests being dealt with under Part IV. The law also contains provision for conciliation committees (articles 16) and for special procedures in autonomous local regions
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SECTION 2 JOINT FORUM ON FINANCIAL CONGLOMERATES
The Joint Forum was established at the beginning of 1996 to take forward the work of the Tripartite Group. 1 The Joint Forum was set up to pursue practical means at domestic and international levels to facilitate the exchange of information between supervisors within their own sectors and between supervisors in different sectors and to investigate any legal or other matters which could impede the exchange of information between officials within their own and between supervisors in different sectors.2 The Joint Forum was also to examine means to enhance supervisory co-ordination including the advantages and disadvantages of establishing criteria to identify and define the responsibilities of a co-ordinator as well as to develop principles for the more effective supervision of regulated firms within financial conglomerates.3 The Joint Forum subsequently published a number of papers in these areas although a Progress Report was issued in April 1997 in advance of the Denver G7 Summit.4 An Interim Report has also been prepared for its constituting committees, although this has not been made available to the general public. While the focus of the work of the Joint Forum is on the main international financial conglomerates, it is concerned not to identify specific groups or to establish a separate set of rules for the supervision of such structures. PROGRESS REPORT In the Progress Report the Joint Forum describes the work carried out to date in connection with the exchange of supervisory information, its Task Force on marketing financial conglomerates, appointing a co-ordinator and developing appropriate principles of supervision.
The Joint Forum is again made up of 25 persons representing the banking, securities and insurance sectors. An equal number of supervisors from each area attend from 13 countries with a representative from the EU Commission to co-ordinate with the related work carried on within the EU. As all 13 countries cannot have three representatives each, a system of allocation operates whereby the larger countries have 3 representatives, medium sized countries 2 and smaller countries 1. 2 See Mandate by the Bar Committee, IOSCO and the IAIS to the Joint Forum. 3 Ibid. 4 See Progress Report by the Joint Forum on Financial Conglomerates, 9 April 1997. See also correspondence from Dr. T Padoa-Schioppa, Chairman of the Basle Committee, A. Neoh, Chairman of the
1
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(I)
Exchange of Information
The Joint Forum conducted a series of surveys with regards to the current practices of Supervisors and the exchange of information nationally and internationally5 and set up a Task Force to develop its understanding of the authority of national supervisors to share information and the nature of the information flows which operated between supervisors.6 From the survey conducted, the Joint Forum concluded that although supervisors generally had power to exchange information this could often only be effected provided that certain conditions were satisfied which were principally concerned with protecting the confidentiality of the information concerned. A number of general principles were recognised to establish a basic framework for the transfer of information which the Joint Forum considered were already in place in each of its participating territories.7 A number of other limitations were also identified which restricted the operation of collaborated efforts in connection with information exchanges.8 The Joint Forum would consider other impediments to the exchange of
Technical Committee of IOSCO and Mr G Pooley, Chairman of the IAIS to Mr Robert E. Rubin, Secretary of the United States Treasury, April 1997. 5 Information was specifically requested with regards to the power of supervisors to exchange supervisory information, the limitations as to the type of supervisory information that can be exchanged and the conditions under which such information may be exchanged, the discretion available to supervisors as to whom supervisory information can be provided, the power of supervisors to keep information received from other supervisors to keep information received from other supervisors confidential and existing agreements between supervisors for the exchange of confidential information. See Interim Report, para. 6. 6 Ibid., para. 7. See sub-section (b) infra. 7 The principles referred to comprised: supervisors receiving confidential information should be subject to adequate confidentiality provisions; information provided to other supervisors should be used only for purposes that are related to or compatible with the regulation of the financial institutions concerned including the enforcement of laws relating to such institutions; confidential supervisory information received by a supervisor should not be transmitted, whenever possible, to any other person without the agreement of the provider; and it was desirable that an information-sharing framework between supervisors include, where legally permissible, appropriate reciprocity arrangements. See Interim Report, para. 8. When supervisors could be compelled by court to disclose confidential information to third parties, the provider of the information should be informed, whenever possible, in advance; ibid. 8 In some cases, the relevant domestic statute does not expressly provide authority to exchange supervisory information with other supervisors. While this may not preclude the exchange of information nationally or internationally, express power to do so should be provided. In other cases, little statutory authority is provided to exchange information between authorities in other sectors apart from within the European Union. Again it was recommended that suitable legislation be adopted to correct this deficiency. In other cases, information may be exchanged with specific authorities the list of which may be unnecessarily restrictive without any appropriate mechanism to extend as necessary; para 12. In yet other cases, information exchanges could only take place where formal agreements had been entered into. While these may be desirable in practice, it is necessary to ensure that they are sufficiently flexible to ensure that information may be exchanged quickly enough in all circumstances including, for example, emergency situations. If formal requirements are required, resources must also be made available to facilitate their conclusions; para 13. INTERNATIONAL LAW INSTITUTE 104 FINAL REPORT - 15 DECEMBER 2003
information and welcome all national efforts to correct any deficiencies identified and extend the authority of their officials as necessary. The use of formal information exchange agreements would also be considered further.9 (II) The Task Force on Mapping
A special Task Force was also established to enhance the Joint Forums understanding of the operations of internationally active financial conglomerates and their impact on supervisory methods.10 A questionnaire was developed to allow the Task Force to map the activities of the conglomerates identified.11 A second questionnaire was also sent to the supervisors concerned to develop understanding of how they discharged their responsibilities with regards to the particular conglomerates involved.12 The mapping exercise was conducted in respect of 13 conglomerates with diverse business interests.13 The Task Force has been able to develop a series of important observations in respect of the groups structures, inter-company relationships, risk information and the audit and internal controls of these groups which are of assistance in constructing an appropriate
The banking and securities authorities in the United Kingdom and the United States had submitted two papers in connection with their co-operative efforts with regards to the supervision of financial conglomerates including information flows and avoiding duplicated work. The European provisions relating to banking and securities firms would also be considered as well as the co-operative arrangements presently in place between the Netherlands and Belgium and between France and Belgium with regards to specific conglomerates; para 17. 10 Para 18. 11 The questions related to: corporate legal and business structures including particulars as to internal and external influences on such organisational structures; management information as to the regulatory framework and organisational arrangements as to compliance with the regulators requirements; corporate management structures, approaches to oversight and organisation of corporate control functions; areas of business, products and distribution channels and returns from those areas; sources, allocation methodology and responsibility for overall capital adequacies; purpose and monitoring of inter-company relationships; management, control and support functions in respect of various risks including, market, credit, liquidity, operating, insurance and legal; structure and responsibilities of internal audits; and scope of external audit and links with internal audit and regulators. See Interim Report, para 19. 12 The questionnaire was completed in respect of each supervisory sector in each country with information being provided in respect of the following: the purpose and objectives of supervision; the legal authorities with respect to the scope of licensing or registration, altering financial institutions powers and structures, obtaining reports and information, sharing information, making on-sight visits, taking intervention action and promulgating prudential and financial integrity standards; the methods of assessing financial conditions via monitoring, on-sight inspections and external auditors, independent actuaries and self-regulatory organisations; XX of supervision; mechanisms to enhance sound practices; and information flows about supervisors. Progress Report, para.20. The results of the questionnaires were distributed between all of the supervisory agencies represented on the Joint Forum to allow them to better understand their colleagues responsibilities and method of operation; para. 21. 13 This included 7 banking groups with securities interests but limited insurance activities, 2 securities groups with banking and insurance operations, 3 insurance groups all of which had additional banking interests and 2 of which conducted securities operations and 1 mixed group with insurance, banking and securities interests; para. 22. INTERNATIONAL LAW INSTITUTE 105 FINAL REPORT - 15 DECEMBER 2003
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supervisory response to the challenges which they create.14 The Task Force noted that in most cases the business line, management and control structure of the firms concerned was distinct from the structure of their legal entities.15 The Task Force also identified a number of issues concerning the nature, completeness and ease of interpretation of information available to supervisors of conglomerates.16 The Joint Forum is also requested Task Force to continue its work in analysing the information collected from the various conglomerates being marked
17
and to revise the
Questionnaire used to obtain additional organisational structural and other information during the
Para. 23. This did create certain efficiencies in business operations but it also created difficulties in management accountability and controls which raised further problems in terms of supervisory responsibility and methods of approach; para. 24. Supervisors had accordingly to understand the legal framework of the entities concerned as disclosed in their boxes and lines organisational charts but also their business and management structures. Complete and up-to-date corporate organisation information should accordingly be requested in connection with the following: all material risk taking subsidiaries and other entities controlled in whole or in part by the conglomerate including asset size, income, capitol and the types of risks undertaken; all subsidiaries and other entities controlled in whole or in part by the conglomerate with significant operational activities, such as back office processing, including asset size, capitol and income; the business line structure of the conglomerate, relevant legal entities participating in the business, location of management responsible for the business and any relevant parts of the business or its operations which are outsourced including the identity of the other company involved; the organisation and location of management of key global control functions such as financial control, risk management and internal audit of the conglomerate; regulated legal entities and relevant supervisors; and non-regulated legal entities. Progress Report, para. 25. 16 These issues were concerned with the differences in information required, intra-group exposures and volume of information available. The complex relationships which existed between the firms legal entity, business line, management and control areas created differences in the information required by supervisors and information routinely collected or readily made available to supervisors having regard to its nature, quality and quantity. While certain key risk and control information may be centralised, other information may be spread across several legal entities; para. 26. With the expansion of the more complex relationships new intra-group exposures were created including off-balance sheet exposures, related guarantees and service agreement relationships. While considerable differences existed in the monitoring of these exposures by firms, many of these were partial and only used to satisfy relevant regulatory requirements; para. 27. The large amount of information which would be of interest to supervisors also created difficulties. As important information may be increasingly centralised, supervisors from other countries may have difficulty in obtaining access to the information while as business lines are extended across legal jurisdictions information requests will be duplicated and regulatory costs increased. Information problems were accordingly significantly increased as more supervisors were involved and the business activities concerned spread across many jurisdictions. The wide diversity in the structure and nature of operation of each conglomerate also prevented the adoption of any single set of enhanced information-sharing and co-ordination rules. Such arrangements had accordingly to be as flexible as possible in dealing with the full range of information required but without imposing excessive regulatory costs; para. 28. 17 This is to attempt to identify core information and its availability within conglomerates and to identify the options available to facilitate the sharing of relevant information between supervisors. The work should improve understanding of information needs in specific areas such as risk information, management communication with supervisors, inter-company relationships and exposures and audit and internal controls; para. 29.
15
14
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course of the mapping exercise.18 This work into understanding the organisation and functioning of conglomerates is to be carried out in parallel with the study of the supervisory structures in place to assist in the identification of differences in national practice and possible impediments to co-ordination of activity and information flows between supervisors as well as possible overlaps and duplication of activity to avoid unnecessary regulatory burdens.19 The results of these studies will be used to develop options to enhance communication and to prepare specific principles for information sharing as well as ion determining the need and possible roles of an information coordinator. 20 While the Joint Forum will prepare recommendations for each of its three constituting committees in due course, supervisors were advised to exchange contact lists as an interim response to the enhancement of access to relevant information.21 (III) Co-ordinator
The Joint Forum has also considered the possible role and responsibilities of a coordinator and appropriate identification criteria. Although it was recognised that the supervision of regulated entities would be enhanced if this supervision was supplemented by the ability to assess risks from a group-wide prospective, it was stressed that each solo supervisor must retain full responsibility for the entities it has under its supervisory charge.22 Such a group-wide risk assessment would, however, require considerable co-operation between supervisors in connection with which a number of options have been considered including the designation of one or more supervisors to co-ordinate the transmission of relevant information.23 In considering the possible roles of the co-ordinator, rather than produce any fixed list of functions and responsibilities the Joint Forum has prepared a spectrum or menu of possible activities. 24 This was considered necessary in light of the distinct structure of particular conglomerates as well as
18
The object of the revision is to obtain a questionnaire which will be used by supervisors as a working tool to obtain valuable information from conglomerates on a unilateral, bilateral or multilateral basis; para. 30. 19 Para. 31. 20 Para. 32. 21 Para. 33. 22 Paras. 34-36. 23 Different arrangements may have to be adopted for passing information from home to host and from host to home supervisors having regard to their distinct needs and responsibilities; para. 36. 24 A limited selection of responsibilities would include acting as information co-ordinator in emergency situations. This could then be extended to include arrangements to facilitate the joint planning and execution of supervisory action especially in emergency situations. A more complete selection could include acting as responsible co-ordinator for a group-wide assessment of risks on an on-going basis. Para. 37. INTERNATIONAL LAW INSTITUTE 107 FINAL REPORT - 15 DECEMBER 2003
the separate legislative frameworks within which supervisors operated and, in particular, the limitations on supervisor to act in concert. Supervisors would have complete discretion in choosing from the options available having regard to the particular circumstances in any specific case. With regards to identification criteria, general rules would be developed although supervisors would be left with sufficient discretion to make an appropriate appointment in any particular circumstances.25 (IV) Principles of Supervision
The Joint Forum has been working to develop a number of specific sets of Principles of Supervision in particular areas. These include group-wide supervision, the fitness and properness of managers, large and intra-group exposures, opaque structures and capitol adequacies. 26 In preparing these principals the Joint Forum has developed three particular themes: (I) The foundation of effective supervision remains the sole supervision of regulated entities
within financial conglomerates although this is to be complimented by a more general groupwide assessment of the risks involved:27 (II) Such a group-wide assessment of financial conglomerates is important to understand the
intricacies of the organisations relationships with and the potential impact of regulated entities although this must not convey the perception that unregulated entities are subject to any official oversight regime which does not exist.28 (III) Regulated entities, their managers, directors and significant shareholders must properly
discharge their responsibilities in ensuring the safety and soundness of the regulated entities
25 26
Para. 38. Apart from capitol adequacy the principles currently being considered include: Supervision of financial conglomerates on a group-wide prospectus; Supervisors ability to check on fit and proper standards of managers and their ability to ensure that shareholders meet adequate standards; Supervisory approach to large exposures and to intra-group exposures within financial conglomerates; and Supervisors ability to intervene in structures that impair effective supervision. Progress Report, para. 43. 27 It is noted that regulated entities are subject to specific legislative and other requirements and that the supervisory principles being developed by the Joint Forum will not be any way supersede those provisions; para. 44. 28 This is necessary to ensure that expectations are not created that the unregulated operations within a conglomerate are subject to official supervision. This relates to the specific problem or moral hazard which can rise with regards to conglomerates in that the perceived scope of supervision may be unintentionally extended to include operations not within the specific remits of the authorities from each of the separate principle financial sectors involved. INTERNATIONAL LAW INSTITUTE 108 FINAL REPORT - 15 DECEMBER 2003
involved and that the structure of the financial conglomerate does not impair the ability of supervisors to carry out their responsibilities.29 With regard to capital matters, a separate Capital Adequacy Working Group was established to consider the techniques for assessing capital adequacy of heterogeneous conglomerates from a group-wide prospective and to develop basic principles for the assessment of such capital adequacy in heterogeneous financial conglomerates.30 The Working Group was also asked to consider the creation of appropriate limitations on double or excessive gearing and have the consistent treatment of participations of less than 100% could be secured. The techniques to be developed should, in so far as possible, provide prudent and consistent results in terms of risks and capital coverage.31 The Working Group has subsequently reviewed the earlier work carried out by the Tripartite Group with respect to capital measurement techniques, 32 reviewed three specific techniques to evaluate group-wide capital33 and considered the treatment of group participations of less then 100% unregulated firms.34 While the more detailed terms of the Interim Report prepared by the Joint Forum has not been made publicly available, a considerable amount of work has already been undertaken with regards to the supervision of financial conglomerates. A number of particular aspects of regulatory concern have been identified and properly dealt with by the Joint Forum. The attention given to information and capital problems are particularly welcome. It only remains to be seen what final provisions are adopted and the detailed content of the various papers on Principles of Supervision are agreed. It must be stressed, however, that the Joint Forum was only established to consider specific matters with regards to conglomerates and was not intended to continue in operation after the publication of its final results. Whether the Joint Forum will be
It is intended that the principles of supervision will stress the responsibilities of regulated entities in these regards; para. 46. 30 See mandate to the Capital Adequacy Working Group reproduced in Progress Report, para. 39. The Working Group has become known as the Spencer Group, adopting the name of its current Chairman. 31 Ibid. 32 The Working Group has attempted to identify certain generic issues which need to be addressed to insure that prudent results are obtained in applying the techniques identified by the early Tripartite Groups work. The existing solo capital adequacy requirements in each of the banking, securities and insurance sectors were assumed; para. 40. 33 The object was to identify double or multiple gearingXX within a conglomerate and the difficulties created through excessive leverage. Unregulated businesses involved in similar activities such as leasing, factoring and reinsurance would also be taken into proper account; para. 41.
29
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continued and in what form is still to be agreed.35 In light of the importance of co-operation in the banking, securities and insurance areas some continuing vehicle must be established to ensure effective implementation and proper revision of the work of the Joint Forum. SUPERVISION OF FINANCIAL CONGLOMERATES The Joint Forum subsequently issued a series of consultation documents under the title Supervision of Financial Conglomerates in February 1998. Two further papers on intra-group transactions and exposures (ITEs) and risk concentrations (RCs) were released in July 1999.36 A final set of documents was issued in December 1999.37 The Joint Forum had reviewed the various means to facilitate the exchange of information between supervisors within their own sectors and between supervisors in different sectors and had investigated the legal or other barriers which could impede the exchange of information between the authorities within their own sectors and between authorities in different sectors. The means of enhancing supervisory co-ordination had also been examined including the advantages and disadvantages of setting out specific criteria to be used identifying a co-ordinated and in defining the co-ordinators responsibilities. Work had also been carried out within the development of principals for the more effective supervision of regulated firms within financial conglomerates. As a result of these efforts seven consultative papers were released. The purpose is to obtain industry and wider supervisory comment before finalising its recommendations. (I) Capital Adequacy Principles
The purpose of the first paper is provide principles and management techniques to facilitate the assessment of capital adequacy on a group wide basis for heterogeneous and actual conglomerates and to identify situations such as double or multiple gearing which can result in a
34
Provisional agreement on the treatment of such participations has been arrived at which operates by graduating scores according to degree of influence and control; para. 42. 35 The matter was to be considered at the IMF Conference in Hong Kong in October 1997. 36 See The Joint Forum, Press Release, 8 July 1999. 37 See Joint Forum, Press Release, 15 December 1999. The final consultation documents were issued in July 1999. See Joint Forum, Press Release, 8 July 1999. Some of the documents had been released by the Basel Committee, IOSCO and the IAIS in February 1999. See Basel Committee, IOSCO and the IAIS, Press Release, 119 February 1999. INTERNATIONAL LAW INSTITUTE 110 FINAL REPORT - 15 DECEMBER 2003
over statement of group capital and which can have a material adverse effect on the regulated financial entities. A number of techniques are set out which have been found useful in assessing group-wide capital or in evaluating the impact of certain practices on regulated entities. These include the building-block prudential approach, the risk-based aggregation method and the riskbased deduction method. A set of mandatory requirements would not be set out in this regard. Rather authorities would have discretion in applying the principals which would be developed further over time. A separate Supplement to the Capital Adequacy Principals Paper was also issued which describes and provides examples of the measurements techniques identified. These provide numerical examples of practical applications of the techniques under cross-referred to the main paper. (II) Fit and Proper Principles
This paper provides guidance to ensure that supervisors of entities within a financial conglomerate are able to exercise their responsibilities to assess whether those entities are soundly and prudently managed. Where key shareholders as defined are a source of weakness are considered. The Joint Forum is also concerned to promote arrangements to facilitate consultation between supervisors in any particular case. Seven guiding principles are set out in the paper. The fit and proper guiding principles are as follows: 1. In order to assist in ensuring that the regulated entities within financial conglomerates are operated prudently and soundly, fitness and propriety or other qualification tests should be applied to managers and directors of other entities in a conglomerate if the exercise and material or controlling influence on the operations of regulated entities. 2. Shareholders whose holdings are above specified thresholds and/or who exert a material influence on regulated entities within that conglomerate should meet the fitness, propriety or other qualification tests of supervisors. 3. Fitness, propriety or other qualification tests should be applied at the authorisation stage and thereafter, on the occurrence of specified events. 4. Supervisors expectations are that the entities will take their measures necessary to ensure that fitness, propriety or other qualification tests are met on a continuous basis.
5.
Where a manager or director deemed to exercise a material influence on the operations of a regulated entity is or has been a manager or directors of another regulated entity within the conglomerate, the supervisor should endeavour to consult the supervisor of the other regulated entity as part of the assessment procedure.
6.
Where a manager or director deemed to exercise a material influence on the operations of a regulated entity is or has been a manager or director of an unregulated entity within the conglomerate, the supervisor should endeavour to consult with the supervisors of other regulated entities that have dealings with the unregulated entity as part of the assessment procedures.
7.
Supervisors should communicate with the supervisors of other regulated entities within the conglomerate when managers, directors or key shareholders are deemed not to meet their fitness, propriety or other qualification tests. (III) Framework for Supervisory Information Sharing
This sets out a general framework for facilitating information-sharing between supervisors or regulated entities within internationally active financial conglomerates. A Task Force had been established by the Joint Forum to examine the structure and operations of 14 large internationally active financial conglomerates. A Conglomerate Questionnaire has been produced which is attached in Annex A to the paper. Further information was obtained on supervisory objectives and approaches and on the authority of supervisors to share information in countries represented in the Joint forum. A quadrant analysis was developed which compared the organisation of business activities along business lines against corporate legal structures and control functions on either a global or local basis. The implications of the different types of conglomerates examined were compared against this analysis and the implications assessed. The different circumstances within which information may have to be exchanged between supervisors was also examined. (IV) Principles for Supervisory Information Sharing
Five principles are developed with respect to the exchange of supervisory information which were designed to build on and enhance existing information sharing arrangement especially those operating on a cross-sector basis. The guiding principles set out are as follows:
1.
Sufficient information should be available to each supervisor, reflecting the legal and regulatory regime and the supervisors objectives and approaches, to effectively supervise the regulated entities residing within the conglomerates.
2.
Supervisors should be proactive in raising material issues and concerns with other supervisors. Supervisors should respond in a timely and satisfactory manner when such issues and concerns are raised with them.
3.
Supervisors should communicate emerging issues and developments of a material and potentially adverse nature, including supervisory actions and potential supervisory actions, to the primary supervisor in a timely manner.
4.
The primary supervisor should share with other relevant supervisors information affecting the regulated entity for which the latter have responsibility including supervisory actions and potential supervisory actions except in unusual circumstances when supervisory considerations dictate otherwise.
5.
Supervisors should purposefully take measures to establish an maintain contact with other supervisors and to establish a climate of co-operation and trust amongst themselves. (V) Co-Ordinator
Assuming the goal of improving co-operation through information-sharing, the objective of this paper is to provide supervisors with guidance in respect of the rules to be applied in identifying a co-ordinator or co-ordinators and with a catalogue of elements of co-ordinations from which supervisors may select the role and responsibilities in emergency and nonemergency situations. The various allocation roles to be applied and the menu of possible functions are accordingly provided. This is a complex issue.38 Despite support by the British Government and supervisory authorities for the appointment of some form of league regulator with a number of defined responsibilities including the co-ordination of information-sharing arrangements, other countries and agencies have not been so supportive. As a compromise a more general set of rules were produced concerning the initial need for a co-ordinator and then for his identification and possible function.
38
See G Walker, Conglomerate Law and International Financial Market Supervision Boston Annual Review of Banking Law [Vol.17.XXX 1998]. 113 FINAL REPORT - 15 DECEMBER 2003
The following guiding principles are proposed in this regard: 1. Arrangements between supervisors relating to the co-ordination process should provide for certain information to be available in emergency and non-emergency situations. 2. The decision to appoint a co-ordinator and the identification of a co-ordinator should be at the discretion of the supervisors involved with the conglomerates. 3. Supervisors should have the discretion to agree amongst themselves the role and responsibilities of a co-ordinator in emergency and non-emergency situations. 4. Arrangements for information flows between the co-ordinator and other supervisors and for any other form of co-ordination in emergency and non-emergency situations should be clarified in advance where possible. 5. Supervisors ability to carry out their supervisory responsibilities should not be constrained by reason of a co-ordinator being identified and a co-ordinator assuming certain responsibilities. 6. The identification of a co-ordinator and the determination of responsibilities for a coordinator should be dedicated on the expectation that those responsibilities would enable supervisors better to carry out the supervision of regulated entities within financial conglomerates. 7. The identification and assumption of responsibilities by a co-ordinator should not create a perception that responsibility has shifted to the co-ordinator. A menu of optional functions is also provided in the form of a catalogue of possible elements of co-ordination. This considered various functions relating to information sharing, group-wide assessment and supervisory activities. Differences in the underlying legal and operational frameworks within which supervisors in different countries operated required that a more general catalogue of elements of co-ordination was developed rather than a fixed set of functions. These also prevented the adoption of a specific set of factors in connection with the identification of the co-ordinator. These factors included differences in legal framework, statutory authority of individual supervisors, accountability to legislative and other bodies, capabilities and resources, supervisory techniques and remedial actions available, ability to share information cross-sectorily and cross-border, business activities, risk profile and structure of
conglomerates and availability of information from conglomerate to supervisors. Although understandable in light of the differences which exist it is regrettable that a more clearly defined set of allocation rules and functions could not be agreed at this stage. This should, however, not prevent the conclusion of appropriate agreement on the identity and role of a co-ordinator or coordinators in any particular case in practice. Much will depend upon the quality of the relationships which already exist between the supervisors concerned. (VI) Supervisory Questionnaire
A separate Supervisory Questionnaire was prepared by a Mapping Task Force to collect information on supervisors objectives and approaches. Authorities are invited to complete the questionnaire in respect of all conglomerates within each sector within their territories in all cases where there is a significant presence. It is hoped that this would permit a comprehensive matching of supervisory structures to be made against the conglomerates business structures. This will in turn allow areas where specific attention or measures are required to be identified. Although at a very early stage of development this may become a very useful analytical tool in understanding how conglomerate structures operate on a supervised and global basis. Of some surprise is the lack of specific information requested with regards to the identity and supervisor of particular conglomerates. Fourteen conglomerates were examined by the Task Force in connection with the Framework for Supervisory Information sharing paper. Although the separate Conglomerate Questionnaire used was drafted for a distinct purpose an examination of the correlation between the different sets of data obtained under that paper and the Supervisory Questionnaire may be of considerable value. The Joint Forum is not, however, concerned with the supervision of any particular entity but only with the development of more effective sets of supervisory principles as outlined in the consultative documents produced. Any more detailed examination of the results obtained under the Conglomerate Questionnaire may have been considered to have amounted to a review of the quality of the supervision exercised by the particular authorities concerned. The issuance of the consultative documents by the Joint Forum is significant in that it allows the market participants involved of the sectors concerned to assess and comment on the prospective rules to be developed to monitor and control their activities. The generality of the rules developed today is unfortunate although understandable at this stage in light of the number
of countries and different sectors involved. Of more importance at this stage has been the understanding developed in conducting the preparatory work involved as well as in the degree of co-operation established between the authorities in the distinct sectors concerned. While a valuable set of basic principles concerning the supervision of financial conglomerates may still be produced, of more practical importance will be the degree of effective co-operation and coordination of activity which can be achieved in relation to the supervision of particular complex financial groups. (VII) Intra-Group Transactions and Exposures The Joint Forum issued two further papers in July 1999 on intra-group transactions and exposures (ITEs) and risk concentrations (RCs).39 While intra-group transactions represent risk exposures between legal entities within a conglomerate, risk concentrations represent exposures across the conglomerate's legal entity. The Joint Forum accepted that both provide legitimate commercial value. Intra-group transactions can facilitate synergies within different parts of the conglomerate generating cost efficiencies and profit maximisation while risk concentrations allow for diversification of risk through the combination of distinct business lines within a single conglomerate. The main difference between the two types of risk was that intra-group exposures had to be dealt with at the legal entity level while concentrations had to be considered at the conglomerate level. With regard to both types of risk, supervisors were advised to ensure that all conglomerates had adequate risk management processes, monitor material risks on a timely basis, encourage maximum public disclosure, liaise closely with other supervisors and respond to any specific material exposures. While a parallel approach was recommended with regard to both types of exposure, differences referred to between the two had also to be taken into account. Intra-group exposures generally represented risks between legal entities within a conglomerate while concentrations represented exposure across all entities. The Joint Forum noted that intra-group risks were generally less well understood and monitored by conglomerates and supervisors. Many conglomerates only considered intra-group
39
See The Joint Forum, Press Release, 8 July 1999. The Joint Forum had conducted an examination into the
practices of each of its representative countries in relation to intra-group exposures and concentrations as well as ten major international financial conglomerates. INTERNATIONAL LAW INSTITUTE 116 FINAL REPORT - 15 DECEMBER 2003
exposures to the extent required by their relevant authorities. Few had developed their own internal approaches to managing and monitoring such risks. Where this was undertaken, however, it was noted that this was as part of an overall process of corporate governance and internal control. The main concern which arose with regard to intra-group exposures was that the stability of the conglomerate may be threatened as a result of transactions entered into between regulated entities within the group. Some controls were placed on the generation of excessive intra-group exposures through restrictions on capital movement, funding and asset movements as well as approval conditions. These were generally monitored through reporting obligations and on-side examinations. Other types of intra-group exposures such as risk management transactions and servicing agreements were considered to raise the same risks as transfers of capital, funding and assets. The general approach adopted was to ensure that cross-sector exposures within the conglomerate were properly monitored at all times with the additional problems created in relation to cross-border supervision being dealt with through enhanced inter-agency co-operation. (VIII) Risk Concentrations While the same basic approach was to be adopted with regard to risk concentrations, the specific concern which arose was that the stability of the conglomerate as a whole could be undermined through pockets of excessive risk maintained. Large aggregate exposures could be generated across legal entities within the group which could affect the stability of parts of its operations or the conglomerate as a whole. Risk concentrations were generally better understood and monitored. In practice, most conglomerates maintained sector specific concentration controls with some also monitoring total group exposure as well. One important recent development was the attention being given to more analytically complex concentrations which reflect the interaction of risk factors or the presence of common risk factors in apparently unrelated sectors of a conglomerate's business. Specific controls were placed on large exposures in specific sectors which were monitored by internal risk management systems. It was important, however, that these were extended to include concentration controls at the group level as well as specific entity or sector exposure. While firms would be required to improve their internal systems accordingly, supervisors had also to consider what information
117
would have to be provided to allow them to monitor concentration controls at the conglomerate level.
JOINT FORUM ON FINANCIAL CONGLOMERATES Summary Recommendations (I) CAPITAL ADEQUACY PRINCIPLES A number of techniques are set out which have been found useful in assessing groupwide capital or in evaluating the impact of certain practices on regulated entities including: 1. 2. 3. Building-Block Prudential Approach, Risk-Based Aggregation Method; and Rrisk-Based Deduction method. A separate Supplement to the Capital Adequacy Principals Paper was also issued which describes and provides examples of the measurements techniques identified. These provide numerical examples of practical applications of the techniques under cross-referred to the main paper. (II) FIT AND PROPER PRINCIPLES The fit and proper guiding principles are as follows:
1.
In order to assist in ensuring that the regulated entities within financial conglomerates are operated prudently and soundly, fitness and propriety or other qualification tests should be applied to managers and directors of other entities in a conglomerate if the exercise and material or controlling influence on the operations of regulated entities.
2.
Shareholders whose holdings are above specified thresholds and/or who exert a material influence on regulated entities within that conglomerate should meet the fitness, propriety or other qualification tests of supervisors.
118
3.
Fitness, propriety or other qualification tests should be applied at the authorisation stage and thereafter, on the occurrence of specified events.
4.
Supervisors expectations are that the entities will take their measures necessary to ensure that fitness, propriety or other qualification tests are met on a continuous basis.
5.
Where a manager or director deemed to exercise a material influence on the operations of a regulated entity is or has been a manager or directors of another regulated entity within the conglomerate, the supervisor should endeavour to consult the supervisor of the other regulated entity as part of the assessment procedure.
6.
Where a manager or director deemed to exercise a material influence on the operations of a regulated entity is or has been a manager or director of an unregulated entity within the conglomerate, the supervisor should endeavour to consult with the supervisors of other regulated entities that have dealings with the unregulated entity as part of the assessment procedures.
7.
Supervisors should communicate with the supervisors of other regulated entities within the conglomerate when managers, directors or key shareholders are deemed not to meet their fitness, propriety or other qualification tests.
(III)
FRAMEWORK FOR SUPERVISORY INFORMATION SHARING This sets out a general framework for facilitating information-sharing between
supervisors or regulated entities within internationally active financial conglomerates. A Task Force had been established by the Joint Forum to examine the structure and operations of 14 large internationally active financial conglomerates. A Conglomerate Questionnaire is attached as Annex A to the paper. (IV) PRINCIPLES FOR SUPERVISORY INFORMATION SHARING Five principles are developed with respect to the exchange of supervisory information which were designed to build on and enhance existing information sharing arrangement especially those operating on a cross-sector basis. The guiding principles set out are as follows:
119
1.
Sufficient information should be available to each supervisor, reflecting the legal and regulatory regime and the supervisors objectives and approaches, to effectively supervise the regulated entities residing within the conglomerates.
2.
Supervisors should be proactive in raising material issues and concerns with other supervisors. Supervisors should respond in a timely and satisfactory manner when such issues and concerns are raised with them.
3.
Supervisors should communicate emerging issues and developments of a material and potentially adverse nature, including supervisory actions and potential supervisory actions, to the primary supervisor in a timely manner.
4.
The primary supervisor should share with other relevant supervisors information affecting the regulated entity for which the latter have responsibility including supervisory actions and potential supervisory actions except in unusual circumstances when supervisory considerations dictate otherwise.
5.
Supervisors should purposefully take measures to establish an maintain contact with other supervisors and to establish a climate of co-operation and trust amongst themselves.
(V)
CO-ORDINATOR The following guiding principles are proposed in this regard:
1.
Arrangements between supervisors relating to the co-ordination process should provide for certain information to be available in emergency and non-emergency situations.
2.
The decision to appoint a co-ordinator and the identification of a co-ordinator should be at the discretion of the supervisors involved with the conglomerates.
3.
Supervisors should have the discretion to agree amongst themselves the role and responsibilities of a co-ordinator in emergency and non-emergency situations.
4.
Arrangements for information flows between the co-ordinator and other supervisors and for any other form of co-ordination in emergency and non-emergency situations should be clarified in advance where possible.
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5.
Supervisors ability to carry out their supervisory responsibilities should not be constrained by reason of a co-ordinator being identified and a co-ordinator assuming certain responsibilities.
6.
The identification of a co-ordinator and the determination of responsibilities for a coordinator should be dedicated on the expectation that those responsibilities would enable supervisors better to carry out the supervision of regulated entities within financial conglomerates.
7.
The identification and assumption of responsibilities by a co-ordinator should not create a perception that responsibility has shifted to the co-ordinator.
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SECTION 3 COMPARATIVE LAW EXAMINATION FINANCIAL HOLDING COMPANY AND FINANCIAL CONGLOMERATE LAWS Japan Financial Laws
Taiwan Law of Financial Holding Company Financial Groups
United States Bank Holding Company Law
United States GrammLeachBliley Act
European Union Financial Conglomerate Directive 2.11 group means two or more natural or legal persons between whom there are close links 2.13 financial conglomerate means a group that meets, subject to Article 3, the following conditions: (a) its activities mainly consist in providing financial services in the financial sector; (b) it comprises at least one regulated entity that has obtained an authorisation in accordance with Article 6 of Directive 73/239/EEC, Article 6 of Directive 79/267/EEC, Article 3 (1) of Directive 93/22/EEC, or Article 4 of Directive 2000/12/EC ; (c) it comprises at least one insurance or reinsurance undertaking, and at least one other entity of a different financial sector ; (d) its cross-sectoral activities in
There is no unified code on financial holding companies. Each of Banking Law (Article 52-17 to 52-35), Securities and Exchange Law, Insurance Business Law (Article 271-18 to 271-31) has provisions for the regulation of financial holding companies. Therefore, as we talked in Japan, either banks, securities companies and insurance companies may set up financial holding companies which have all of banks, securities companies and insurance companies as their subsidiaries.
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Taiwan Law of Financial Holding Company
Japan Financial Laws
European Union Financial Conglomerate Directive the financial sector as referred to in (c) are significant ;
Financial Holding Company 4.2 Financial holding company: a company with controlling interest in a bank, insurance company or securities firm established in accordance with the law.
Banking Law Section 2. 13 Bank holding company: A holding company with banks as its subsidiaries, while established in accordance with Section 52. 17(1) and approved according to Section 52. 17 (3).
SEC. 2 (p) FINANCIAL HOLDING COMPANY.--For purposes of this Act, the term "financial holding company" means a bank holding company that meets the requirements of section 4(l)(1). SEC. 2 (a)(1) "bank holding company" means any company which has control over any bank or over any company that is or becomes a bank holding company by virtue of this Act.
Mixed Holding Company
2.14 mixed financial holding company means a parent undertaking, other than a regulated entity, which together with its subsidiaries, of which at least one is a regulated entity that has its head office in the Community, and other entities, constitutes a financial conglomerate Banking Law Section 52. 17 Holding companies with SEC 5. (b) The Board is authorized to issue such 123 2.15 competent authorities mean the national authorities of FINAL REPORT - 15 DECEMBER 2003
Competent Authorities Art. 3 Competent authority
Taiwan Law of Financial Holding Company provided herein is the competent authority in the Banking Law.
Japan Financial Laws banking subsidiaries established through the following transactions are subject to the authorization of the Prime Minister.
United States Bank Holding Company Law regulations and orders as may be necessary to enable it to administer and carry out the purposes of this Act and prevent evasions thereof.
European Union Financial Conglomerate Directive the Member States which are empowered by law or regulation to supervise credit institutions, and/or insurance undertakings and/or investment firms 7.1 In order to ensure a proper supplementary supervision of the regulated entities in a financial conglomerate, the competent authorities concerned shall appoint amongst them a co-ordinator, where necessary composed of more than one competent authority, responsible for co-ordination and exercise of the supplementary supervision.
Intra-Group Transaction
Banking Law Section 13. 2 Banks are forbidden to engage in the following trading or transactions with those having particular relationship (subsidiaries of the banks, major shareholders, holding company, subsidiaries of the holding company (excluding the banks) and persons with special relationship as provided by governmental ordinances) or their customers. However, trading or transactions taken on the basis of necessities provided by Cabinet ordinances and 124
2.16intra-group transactions mean all transactions by which regulated entities within a financial conglomerate rely either directly or indirectly upon other entities within the same group for the fulfillment of an obligation, whether or not contractual, whether or not for payment 6.3 The Member States or the competent authorities concerned shall require regulated entities or mixed financial holding companies to report on a regular FINAL REPORT - 15 DECEMBER 2003
Japan Financial Laws approved by the Prime Minister are exempted as such. (1) transactions with those having particular relationship are subject to the conditions stipulated by Cabinet ordinances and should have no harm to the banks in accordance with their normal criteria of transaction. (2) trading or transactions with those with particular relationship or their customers as stipulated by Cabinet ordinances do not incur handicap to the soundness of the banks business and normal operation.
European Union Financial Conglomerate Directive basis and at least annually to the competent authority responsible for the supplementary supervision, all significant intragroup transactions within a financial conglomerate as well as any significant risk concentration at the level of the financial conglomerate, in accordance with the rules laid down in this Article and in Annex II
Concentration
2.17 risk concentration means all exposures with a loss potential borne by entities within a financial conglomerate, which are large enough to threaten the solvency or the financial position in general of the regulated entities in the financial conglomerate, and which exposures may be caused by counterparty risk/credit risk, investment risk, insurance risk, 125 FINAL REPORT - 15 DECEMBER 2003
European Union Financial Conglomerate Directive market risk, other risks, or a combination or interaction of these risks.
Holding Company
Banking Law Section 2. 12 holding company: A company stipulated in the Monopoly Prohibition Act and Section 9. 5 (1) of the Safeguarding Fair Trade Act (1947). Banking Law Section 52. 23 A bank holding company shall not make any other company than listed below its subsidiary: (1) a long-term credit bank; (2) a specialized securities company; (3) an insurance company; (4) a foreign company engaging banking business; (5) a foreign company engaging securities business (except a company categorized as above 4); (6) a foreign company engaging insurance business (except a company categorized as above 4); 7-9 omitted SEC 4. (k) (4) ACTIVITIES THAT ARE FINANCIAL IN NATURE.--For purposes of this subsection, the following activities shall be considered to be financial in nature: (A) Lending, exchanging, transferring, investing for others, or safeguarding money or securities. (B) Insuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability, or death, or providing and issuing annuities, and acting as principal, agent, or broker for purposes of the foregoing, in any State. (C) Providing financial, investment, or economic advisory services, including advising an investment company (as defined in section 126
Financial Activities Art. 36 A financial holding company may invest in the following business: (a) banking; (b) bill financing; (c) credit card; (d) trust; (e) insurance; (f) securities; (g) futures; (h) venture capital; (i) foreign financial institutions approved by competent authority; (j) other related financial business specified by competent authority.
SEC. 103. FINANCIAL ACTIVITIES. (a) IN GENERAL.Section 4 of the Bank Holding Company Act of 1956 is amended by adding at the end the following new subsections: (k) ENGAGING IN ACTIVITIES THAT ARE FINANCIAL IN NATURE. (4) ACTIVITIES THAT ARE FINANCIAL IN NATURE.-For purposes of this subsection, the following activities shall be considered to be financial in nature: (A) Lending, exchanging, transferring, investing for others, or safeguarding money or securities. (B) Insuring, guaranteeing, or indemnifying against loss, FINAL REPORT - 15 DECEMBER 2003
Japan Financial Laws Insurance Business Law Section 271. 22 An insurance holding company shall obtain the prior approval of Prime Minister to make any other company than listed below its subsidiary: (1) a life insurance company; (2) a non-life insurance company; (3) a bank; (4) a long-term credit bank; (5) a specialized securities company; (6) a foreign company engaging insurance business; (7) a foreign company engaging banking business (except a company categorized as above 6); (8) a foreign company engaging securities business (except a company categorized as above 6); 9-11 omitted
United States Bank Holding Company Law 3 of the Investment Company Act of 1940). (D) Issuing or selling instruments representing interests in pools of assets permissible for a bank to hold directly. (E) Underwriting, dealing in, or making a market in securities. (F) Engaging in any activity that the Board has determined, by order or regulation that is in effect on the date of the enactment of the Gramm-LeachBliley Act, to be so closely related to banking or managing or controlling banks as to be a proper incident thereto (subject to the same terms and conditions contained in such order or regulation, unless modified by the Board). (G) Engaging, in the United States, in any activity that-(i) a bank holding company may engage in outside of the United States; and (ii) the Board has determined, under regulations prescribed or interpretations issued pursuant to subsection (c)(13) (as in effect on the day before the date of the enactment of the Gramm-Leach-Bliley Act) to be usual in connection 127
United States GrammLeachBliley Act harm, damage, illness, disability, or death, or providing and issuing annuities, and acting as principal, agent, or broker for purposes of the foregoing, in any State. (C) Providing financial, investment, or economic advisory services, including advising an investment company (as defined in section 3 of the Investment Company Act of 1940). (D) Issuing or selling instruments representing interests in pools of assets permissible for a bank to hold directly. (E) Underwriting, dealing in, or making a market in securities. (F) Engaging in any activity that the Board has determined, by order or regulation that is in effect on the date of the enactment of the Gramm-LeachBliley Act, to be so closely related to banking or managing or controlling banks as to be a proper incident thereto (subject to the same terms and conditions contained in such order or regulation, unless modified by the Board). (G) Engaging, in the United States, in any activity that--
European Union Financial Conglomerate Directive
United States Bank Holding Company Law with the transaction of banking or other financial operations abroad. (H) Directly, or indirectly acquiring or controlling, whether as principal, on behalf of 1 or more entities (including entities, other than a depository institution or subsidiary of a depository institution, that the bank holding company controls), or otherwise, shares, assets, or ownership interests (include debt or equity securities, partnership interests, trust certificates, or other instruments representing ownership) of a company or other entity, whether or not constituting control of such company or entity, engaged in any activity not authorized pursuant to this section if-(i) the shares, assets, or ownership interests are not acquired or held by a depository institution or subsidiary of a depository institution; (ii) such shares, assets, or ownership interests are acquired and held by-(I) a securities affiliate or an affiliate thereof; or (II) an affiliate of an insurance company described in subparagraph (I)(ii) that
United States GrammLeachBliley Act (i) a bank holding company may engage in outside of the United States; and (ii) the Board has determined, under regulations prescribed or interpretations issued pursuant to subsection (c)(13) (as in effect on the day before the date of the enactment of the Gramm-Leach-Bliley Act) to be usual in connection with the transaction of banking or other financial operations abroad. (H) Directly, or indirectly acquiring or controlling, whether as principal, on behalf of 1 or more entities (including entities, other than a depository institution or subsidiary of a depository institution, that the bank holding company controls), or otherwise, shares, assets, or ownership interests (include debt or equity securities, partnership interests, trust certificates, or other instruments representing ownership) of a company or other entity, whether or not constituting control of such company or entity, engaged in any activity not authorized pursuant to this section if-(i) the shares, assets, or ownership interests are not
128
United States Bank Holding Company Law provides investment advice to an insurance company and is registered pursuant to the Investment Advisers Act of 1940, or an affiliate of such investment adviser; as part of a bona fide underwriting or merchant or investment banking activity, including investment activities engaged in for the purpose of appreciation and ultimate resale or disposition of the investment; (iii) such shares, assets, or ownership interests are held for a period of time to enable the sale or disposition thereof on a reasonable basis consistent with the financial viability of the activities described in clause (ii); and (iv) during the period such shares, assets, or ownership interests are held, the bank holding company does not routinely manage or operate such company or entity except as may be necessary or required to obtain a reasonable return on investment upon resale or disposition. (I) Directly or indirectly acquiring or controlling, whether as principal, on behalf of 1 or more entities (including entities, other than a depository
United States GrammLeachBliley Act acquired or held by a depository institution or subsidiary of a depository institution; (ii) such shares, assets, or ownership interests are acquired and held by-(I) a securities affiliate or an affiliate thereof; or (II) an affiliate of an insurance company described in subparagraph (I)(ii) that provides investment advice to an insurance company and is registered pursuant to the Investment Advisers Act of 1940, or an affiliate of such investment adviser; as part of a bona fide underwriting or merchant or investment banking activity, including investment activities engaged in for the purpose of appreciation and ultimate resale or disposition of the investment; (iii) such shares, assets, or ownership interests are held for a period of time to enable the sale or disposition thereof on a reasonable basis consistent with the financial viability of the activities described in clause (ii); and (iv) during the period such shares, assets, or ownership interests are held, the bank holding company does not
129
United States Bank Holding Company Law institution or subsidiary of a depository institution, that the bank holding company controls) or otherwise, shares, assets, or ownership interests (including debt or equity securities, partnership interests, trust certificates or other instruments representing ownership) of a company or other entity, whether or not constituting control of such company or entity, engaged in any activity not authorized pursuant to this section if-(i) the shares, assets, or ownership interests are not acquired or held by a depository institution or a subsidiary of a depository institution; (ii) such shares, assets, or ownership interests are acquired and held by an insurance company that is predominantly engaged in underwriting life, accident and health, or property and casualty insurance (other than credit-related insurance) or providing and issuing annuities; (iii) such shares, assets, or ownership interests represent an investment made in the ordinary course of business of such insurance company in accordance with relevant State law governing such
United States GrammLeachBliley Act routinely manage or operate such company or entity except as may be necessary or required to obtain a reasonable return on investment upon resale or disposition. (I) Directly or indirectly acquiring or controlling, whether as principal, on behalf of 1 or more entities (including entities, other than a depository institution or subsidiary of a depository institution, that the bank holding company controls) or otherwise, shares, assets, or ownership interests (including debt or equity securities, partnership interests, trust certificates or other instruments representing ownership) of a company or other entity, whether or not constituting control of such company or entity, engaged in any activity not authorized pursuant to this section if-(i) the shares, assets, or ownership interests are not acquired or held by a depository institution or a subsidiary of a depository institution; (ii) such shares, assets, or ownership interests are acquired and held by an insurance company that is predominantly engaged in underwriting life,
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United States Bank Holding Company Law investments; and (iv) during the period such shares, assets, or ownership interests are held, the bank holding company does not routinely manage or operate such company except as may be necessary or required to obtain a reasonable return on investment. SEC. 5. 4) Functional regulation of securities and insurance activities.-(A) SECURITIES ACTIVITIES.--Securities activities conducted in a functionally regulated subsidiary of a depository institution shall be subject to regulation by the Securities and Exchange Commission, and by relevant State securities authorities, as appropriate, subject to section 104 of the Gramm-Leach-Bliley Act, to the same extent as if they were conducted in a nondepository institution subsidiary of a bank holding company. (B) INSURANCE ACTIVITIES.--Subject to section 104 of the GrammLeach-Bliley Act, insurance agency and brokerage activities and activities as principal conducted in a functionally
United States GrammLeachBliley Act accident and health, or property and casualty insurance (other than credit-related insurance) or providing and issuing annuities; (iii) such shares, assets, or ownership interests represent an investment made in the ordinary course of business of such insurance company in accordance with relevant State law governing such investments; and (iv) during the period such shares, assets, or ownership interests are held, the bank holding company does not routinely manage or operate such company except as may be necessary or required to obtain a reasonable return on investment.
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United States Bank Holding Company Law regulated subsidiary of a depository institution shall be subject to regulation by a State insurance authority to the same extent as if they were conducted in a nondepository institution subsidiary of a bank holding company.
Foreign Financial Firms 4.6 Foreign financial holding company: a company registers with a foreign legal authority while has controlling interest in a bank, insurance company or securities firm. Art. 23 Conforming to the following criteria, foreign financial holding companies, upon the authorization of the competent authority, are not required to establish separate financial holding companies in the jurisdiction: (a) having reached conditions laid down in Art.9 for the establishment of a financial holding company; (b) having management experience as a financial holding company with distinguished fame; (c) competent authority in home country approves the application to invest in subsidiaries within the territory and agrees to the INTERNATIONAL LAW INSTITUTE
SEC.4. (l) (3) FOREIGN BANKS.--For purposes of paragraph (1), the Board shall apply comparable capital and management standards to a foreign bank that operates a branch or agency or owns or controls a commercial lending company in the United States, giving due regard to the principle of national treatment and equality of competitive opportunity.
SEC. 114 (b) (4) FOREIGN BANKS.The Board may, by regulation or order, impose restrictions or requirements on relationships or transactions between a branch, agency, or commercial lending company of a foreign bank in the United States and any affiliate in the United States of such foreign bank that the Board finds are (A) consistent with the purposes of this Act, the Bank Holding Company Act of 1956, the Federal Reserve Act, and other Federal law applicable to foreign banks and their affiliates in the United States; and (B) appropriate to prevent an evasion of any provision of law referred to in subparagraph (A) or to avoid any significant risk to the safety and soundness of depository institutions or any Federal deposit insurance fund or other adverse effects, such as undue concentration of
15.1 Article 25, paragraphs 1 and 2, of Directive 2000/12/EC and Article 10a of Directive 98/78/EC apply mutatis mutandis for the negotiation of agreements with one or more third countries regarding the means of exercising supplementary supervision of regulated entities in a financial conglomerate.
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Taiwan Law of Financial Holding Company coordinated financial consolidated supervision; (d) competent authority in home country and headquarter of a financial holding company have the capacity of consolidated supervision upon subsidiaries within the territory; (e) headquarter of a financial holding company has designated litigious and non-litigious representatives within the territory.
United States GrammLeachBliley Act resources, decreased or unfair competition, conflicts of interests, or unsound banking practices. SEC. 141. FOREIGN BANKS THAT ARE FINANCIAL HOLDING COMPANIES. Section 8(c) of the International Banking Act of 1978 is amended by adding at the end the following new paragraph: (3) TERMINATION OF GRANDFATHERED RIGHTS. (A) IN GENERAL.If any foreign bank or foreign company files a declaration under section 4(l)(1)(C) of the Bank Holding Company Act of 1956, any authority conferred by this subsection on any foreign bank or company to engage in any activity that the Board has determined to be permissible for financial holding companies under section 4(k) of such Act shall terminate immediately. (B) RESTRICTIONS AND REQUIREMENTS AUTHORIZED. If a foreign bank or company that engages, directly or through an affiliate pursuant to paragraph (1), in an activity that
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United States GrammLeachBliley Act the Board has determined to be permissible for financial holding companies under section 4(k) of the Bank Holding Company Act of 1956 has not filed a declaration with the Board of its status as a financial holding company under such section by the end of the 2-year period beginning on the date of the enactment of the GrammLeach-Bliley Act, the Board, giving due regard to the principle of national treatment and equality of competitive opportunity, may impose such restrictions and requirements on the conduct of such activities by such foreign bank or company as are comparable to those imposed on a financial holding company organized under the laws of the United States, including a requirement to conduct such activities in compliance with any prudential safeguards established under section 114 of the GrammLeach-Bliley Act..
Parent Company
2.8 parent undertaking means a parent undertaking within the meaning of Article 1 of Council Directive 83/349/EEC and any undertaking which, in the 134 FINAL REPORT - 15 DECEMBER 2003
European Union Financial Conglomerate Directive opinion of the competent authorities, effectively exercises a dominant influence over another undertaking 2.9 subsidiary undertaking means a subsidiary undertaking within the meaning of Article 1 of Directive 83/349/EEC and any undertaking over which, in the opinion of the competent authorities, a parent undertaking effectively exercises a dominant influence; all subsidiary undertakings of subsidiary undertakings shall also be considered subsidiary undertakings of the parent undertaking
Subsidiary 4.4 Subsidiary: (1) Banking subsidiary: a bank within which a financial holding company has controlling interest. (2) Insurance subsidiary: an insurance company within which a financial holding company has controlling interest. (3) Securities subsidiary: a securities firm within which a financial holding company has controlling interest. (4) Other companies within which a financial holding company holds over 25% voting shares issued or more than 25% of total assets, or it directly or indirectly elects or appoints over half of the directors in their boards.
SEC.2.(d) "Subsidiary", with respect to a specified bank holding company, means (1) any company 25 per centum or more of whose voting shares (excluding shares owned by the United States or by any company wholly owned by the United States) is directly or indirectly owned or controlled by such bank holding company, or is held by it with power to vote; (2) any company the election of a majority of whose directors is controlled in any manner by such bank holding company; or (3) any company with respect to the management or policies of which such bank holding company has the power, directly or indirectly, to exercise a controlling influence, as determined by the Board, after notice and opportunity for hearing. SEC. 2. (k) AFFILIATE.--For purposes of this Act the term "affiliate" means any company that controls, is controlled by, or
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United States Bank Holding Company Law is under common control with another company.
Control 4.1 Controlling interest: holding over 25% voting shares issued by a bank, insurance company or securities firm or more than 25% of its total assets; or directly or indirectly electing or appointing over half of the directors in the board of a bank, insurance company or securities firm.
SEC. 2. (a) (2) Any company has control over a bank or over any company if-(A) the company directly or indirectly or acting through one or more other persons owns, controls, or has power to vote 25 per centum or more of any class of voting securities of the bank or company; (B) the company controls in any manner the election of a majority of the directors or trustees of the bank or company; or (C) the Board determines, after notice and opportunity for hearing, that the company directly or indirectly exercises a controlling influence over the management or policies of the bank or company. (3) For the purposes of any proceeding under paragraph (2)(C) of this subsection, there is a presumption that any company which directly or indirectly owns, controls, or has power to vote less than 5 per centum of any class of voting securities of a given bank or company does not have control over that bank or company. 136 FINAL REPORT - 15 DECEMBER 2003
United States Bank Holding Company Law (4) In any administrative or judicial proceeding under this Act, other than a proceeding under paragraph (2)(C) of this subsection, a company may not be held to have had control over any given bank or company at any given time unless that company, at the time in question, directly or indirectly owned, controlled, or had power to vote 5 per centum or more of any class of voting securities of the bank or company, or had already been found to have control in a proceeding under paragraph (2)(C). SEC. 2. (g) For the purposes of this Act-(1) shares owned or controlled by any subsidiary of a bank holding company shall be deemed to be indirectly owned or controlled by such bank holding company; and (2) shares held or controlled directly or indirectly by trustees for the benefit of (A) a company, (B) the shareholders or members of a company, or (C) the employees (whether exclusively or not) of a company, shall be deemed to be controlled by such company.
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Taiwan Law of Financial Holding Company Significant Influence 4.10 Major shareholder: a person holding over 10% of shares issued by a financial company or its subsidiaries or more than 10% of their total assets; in case that a major shareholder is a natural person, shares held by his espouse or underage children should be calculated as consolidated shareholding.
Participation
2.10 participation means a participation within the meaning of Article 17, first sentence, of Council Directive 78/660/EEC, or the direct or indirect ownership of 20% or more of the voting rights or capital of an undertaking 2.12 close links means close links within the meaning of Article 1(l) of Directive 92/49/EEC, Article 1(m) of Directive 92/96/EEC, Article 1(15) of Directive 93/22/EEC or Article 1(26) of Directive of 2000/12/EC, as well as : (a) a situation in which in the opinion of the competent authorities one or more persons effectively exercise a dominant influence over another person; 138 FINAL REPORT - 15 DECEMBER 2003
Close Links
European Union Financial Conglomerate Directive (b) a situation in which persons are linked by a participation within the meaning of Article 17, first sentence, of Council Directive 78/660/EEC; (c) or a situation in which persons are linked by a relationship within the meaning of Article 12 (1) of Directive 83/349/EEC.
License and Scope Art. 9 Upon the approval of the establishment of a financial holding company, the competent authority should consider the following criteria: (a) Financial soundness and management capacity; (b) Capital adequacy; (c) Impact on the market competition and the promotion of public interests. Art.10 The organization of a financial holding company should be a company limited by shares. Unless otherwise authorized by the competent authority, the shares should be publicly issued. Art. 17 The scope and qualifications of the sponsor and leading officers in a financial
Banking Law Section 52. 8 Upon the application submitted according to the exceptional proceedings provided in Section 52. 1 and Section 52. 3, the Prime Minister should approve on the basis of the following criteria: (1) satisfactory prospect for the income and expense balance of the applicant and its subsidiaries; (2) proper conditions of capital adequacy in the applicant and its subsidiaries; (3) management of the applicant has knowledge and experience on the fair and accurate operation of banking business and good social credit;
SEC. 3. (a) It shall be unlawful, except with the prior approval of the Board, (1) for any action to be taken that causes any company to become a bank holding company; (2) for any action to be taken that causes a bank to become a subsidiary of a bank holding company; (3) for any bank holding company to acquire direct or indirect ownership or control of any voting shares of any bank if, after such acquisition, such company will directly or indirectly own or control more than 5 per centum of the voting shares of such bank; (4) for any bank holding company or subsidiary thereof, other than a bank, to acquire all or substantially all of the assets of a bank; or (5) for any bank 139
SEC. 151. AUTHORITY OF NATIONAL BANKS TO UNDERWRITE CERTAIN MUNICIPAL BONDS. The paragraph designated the Seventh of section 5136 of the Revised Statutes of the United States (12 U.S.C. 24(7)) is amended by adding at the end the following new sentence: In addition to the provisions in this paragraph for dealing in, underwriting, or purchasing securities, the limitations and restrictions contained in this paragraph as to dealing in, underwriting, and purchasing investment securities for the national banks own account shall not apply to obligations (including limited obligation bonds, revenue bonds, and obligations that satisfy the
3.1 For the purposes of determining whether the activities of a group consist mainly in providing financial services within the meaning of Article 2 (13) (a) , the ratio of the consolidated and/or aggregated balance sheet total of the regulated and non regulated financial sector entities in the group to the consolidated and/or aggregated balance sheet total of the group as a whole, calculated on the basis of the annual accounts, should exceed 50%. When a group is headed by a regulated entity, and if the conditions set out in Article 2 (13) (b), (c) and (d) are met, the group will qualify as a financial conglomerate, regardless of the groups ratio.
Taiwan Law of Financial Holding Company holding company are subject to the regulations and rules of the competent authority. For sake of cross investment, leading officers in a financial holding company may assume positions in subsidiaries, exempting from the limitations in Article 51 of the Law of Securities Exchange. In any names, leading officers and employers of a financial holding company are prohibited to take commission, remuneration and other unjust benefit from trading partners and customers or those of subsidiaries. Art. 24 Upon the authorization of competent authority, a financial institution may be transferred into a financial holding company through business assignment. Art. 26 Upon the authorization of competent authority, a financial institution may be transferred into a subsidiary of a financial holding company by stock swap. Art. 36 Leading officers and employers in a financial holding company should not manage the investment of the venture capital division of the company. For a financial holding company
Japan Financial Laws (4) a bank holding company (excluding those established in accordance with foreign regulations) should be a stock company.
United States Bank Holding Company Law holding company to merge or consolidate with any other bank holding company. SEC.4. (l) Conditions for Engaging in Expanded Financial Activities.-(1) IN GENERAL.-- a bank holding company may not engage in any activity, or directly or indirectly acquire or retain shares of any company engaged in any activity other than activities permissible for any bank holding company unless-(A) all of the depository institution subsidiaries of the bank holding company are well capitalized; (B) all of the depository institution subsidiaries of the bank holding company are well managed; and (C) the bank holding company has filed with the Board-(i) a declaration that the company elects to be a financial holding company to engage in activities or acquire and retain shares of a company that were not permissible for a bank holding company to engage in or acquire before the enactment of the Gramm-Leach-Bliley 140
United States GrammLeachBliley Act requirements of section 142(b)(1) of the Internal Revenue Code of 1986) issued by or on behalf of any State or political subdivision of a State, including any municipal corporate instrumentality of 1 or more States, or any public agency or authority of any State or political subdivision of a State, if the national bank is well capitalized (as defined in section 38 of the Federal Deposit Insurance Act).. SEC. 213. INDEPENDENT DIRECTORS. (a) IN GENERAL.Section 2(a)(19)(A) of the Investment Company Act of 1940 (15 U.S.C. 80a2(a)(19)(A)) is amended (1) by striking clause (v) and inserting the following new clause: (v) any person or any affiliated person of a person (other than a registered investment company) that, at any time during the 6month period preceding the date of the determination of whether that person or affiliated person is an interested person, has executed any portfolio transactions for, engaged in any principal transactions with, or
European Union Financial Conglomerate Directive 3.2 For the purposes of determining whether activities in different financial sectors are significant within the meaning of Article 2 (13) (d), the average of the ratio of the balance sheet total of the smallest financial sector to the consolidated and/or aggregated balance sheet total of the financial sector entities in the group, calculated on the basis of the annual accounts, and the ratio of the solvency requirements of the smallest financial sector to the total solvency requirements of the financial sector entities in the group, should exceed 10%. The smallest financial sector in a financial conglomerate is the sector with the smallest average. For the purposes of calculating the average, the banking sector and the investment services sector shall be considered together. The solvency requirements shall be calculated in accordance with the provisions of the sectoral rules and this Directive. 6.2 The Member States or the competent authorities concerned shall require regulated entities to have in place within the
Taiwan Law of Financial Holding Company transferred from a bank/ banks, investments of the latter should since then be done by the former. Business invested by a bank before the establishment of a financial holding company may be continuously kept with it upon the authorization of competent authority, while the investment should not be enlarged. Art. 37 A financial holding company may apply for investing in the business other than those stipulated in Art.36. However, it is forbidden to take part in the operation of the business.
United States Bank Holding Company Law Act; and (ii) a certification that the company meets the requirements of subparagraphs (A) and (B). (2) CRA REQUIREMENTS.- the appropriate Federal banking agency shall prohibit a financial holding company or any insured depository institution from-(A) commencing any new activity under subsection (k) or (n) of this section, section 5136A(a) of the Revised Statutes of the United States, or section 46(a) of the Federal Deposit Insurance Act; or (B) directly or indirectly acquiring control of a company engaged in any activity under subsection (k) or (n) of this section, section 5136A(a) of the Revised Statutes of the United States, or section 46(a) of the Federal Deposit Insurance Act (other than an investment made pursuant to subparagraph (H) or (I) of subsection (k)(4), or section 122 of the GrammLeach-Bliley Act, or under section 46(a) of the Federal Deposit Insurance Act by reason of such section 122, by an affiliate already engaged in activities under any such 141
United States GrammLeachBliley Act distributed shares for (I) the investment company; (II) any other investment company having the same investment adviser as such investment company or holding itself out to investors as a related company for purposes of investment or investor services; or (III) any account over which the investment companys investment adviser has brokerage placement discretion,; (3) by inserting after clause (v) the following new clause: (vi) any person or any affiliated person of a person (other than a registered investment company) that, at any time during the 6-month period preceding the date of the determination of whether that person or affiliated person is an interested person, has loaned money or other property to (I) the investment company; (II) any other investment company having the same investment adviser as such investment company or holding itself out to investors as a related company for purposes of investment or investor services;
European Union Financial Conglomerate Directive financial conglomerate adequate risk management processes and internal control mechanisms, including sound reporting and accounting procedures, in order to identify, measure, monitor and control the intragroup transactions within a financial conglomerate and the risk concentration at the level of the financial conglomerate appropriately.
United States Bank Holding Company Law provision); if any insured depository institution subsidiary of such financial holding company, or the insured depository institution or any of its insured depository institution affiliates, has received in its most recent examination under the Community Reinvestment Act of 1977, a rating of less than "satisfactory record of meeting community credit needs".
United States GrammLeachBliley Act or (III) any account for which the investment companys investment adviser has borrowing authority,.
Holding Company Roles Art. 51 A financial holding company should establish internal control and examination mechanism, the detail of which is subject to the regulations of competent authority. Art. 53 When its banking, insurance or securities subsidiaries are ordered to make up the capital requirement, a financial holding company should raise capital for them within its liability limited by share. In case the total loss of exceeds 1/3 of its assets, a financial
Banking Law Section 52.21 (1) Bank holding companies should not engage in the business other than banking and operations and ancillary business of the companies provided in the Section 52.23. (2) Banking holding companies should endeavour to safeguard the soundness of their banking business. FSA inspection manual on financial holding companies: some check points to inspect whether good management of a financial folding company is
SEC. 205. TREATMENT OF NEW HYBRID PRODUCTS. Section 15 of the Securities Exchange Act of 1934 (15 U.S.C. 78o) is amended by adding at the end the following new subsection: (i) RULEMAKING TO EXTEND REQUIREMENTS TO NEW HYBRID PRODUCTS. (2) LIMITATION.The Commission shall not (A) require a bank to register as a broker or dealer under this section because the bank
10. The competent authorities shall ensure that in all undertakings included in the scope of supplementary supervision pursuant to Article 4, there are adequate internal control mechanisms for the production of any data and information which would be relevant for the purposes of the supplementary supervision.
FSA published the inspection manual on financial holding companies on July 29. FSAs position is that the manual is not a rule or law and that it is only a reference of inspectors, but we may not deny that it has significant influence on practice. The manual consists of two parts: (1) basic ideas and (2) check lists for each of three categories of financial holding companies (bank holding company, securities holding company and insurance holding company).
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Taiwan Law of Financial Holding Company holding company should instantly convene the board of directors, with supervisors attending as nonvoting delegates, and submit the decision of the board, financial statement, reasons for loss and plan for improvement to the competent authority. Art. 55 When the investment of a financial holding company significantly threats the sound operation of its banking, insurance or securities subsidiaries, competent authority may command the financial holding company to dispose the shares it holds in the business invested within a certain period, decrease the voting shares or the assets it holds in the banking, insurance or securities subsidiaries, or the number of directors it directly or indirectly elects or appoints to the extent that is insufficient for a financial holding company. Art. 56 When the ratio of capital adequacy of banking, insurance or securities subsidiaries in a financial holding company falls below the minimum level stipulated by the competent authority, or in case that their business operation or financial
Japan Financial Laws established: (a) Capital policy -Sufficient Capital -Good Allocation -Compliance with the relevant rules (b) Inter-group Transactions (FSA considers that inter-group transactions have a side effect to hide risks and losses by transferring them between group companies) -Risk Management -Compliance with the relevant rules -Fairness of fee and dividends received by the holding company (c) Control of customer information -No illegal share or common use of customer information (d) Contingency Plan -Risk management to avoid the spread of losses or damages which occurred in one company to other group companies
United States GrammLeachBliley Act engages in any transaction in, or buys or sells, a new hybrid product; or (B) bring an action against a bank for a failure to comply with a requirement described in subparagraph (A), unless the Commission has imposed such requirement by rule or regulation issued in accordance with this section. SEC. 211. CUSTODY OF INVESTMENT COMPANY ASSETS BY AFFILIATED BANK. (a) MANAGEMENT COMPANIES.Section 17(f) of the Investment Company Act of 1940 (15 U.S.C. 80a17(f)) is amended (4) by adding at the end the following new paragraph: (6) The Commission may, after consultation with and taking into consideration the views of the Federal banking agencies (as defined in section 3 of the Federal Deposit Insurance Act), adopt rules and regulations, and issue orders, consistent with the protection of investors, prescribing the conditions under which a bank, or an affiliated person of a bank, either of which is an affiliated
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Taiwan Law of Financial Holding Company status deteriorates considerably and this makes them unable to service their debts or threats to damage the interests of customers, the financial holding company should assist them to return normal operation. For the necessity of safeguarding public interest or financial stability, the competent authority may order a financial holding company to honor its obligation provided herein, or to dispose all or part of the shares, business or assets it invests in other sectors to raise capital for the improvement of financial plight of its banking, insurance or securities subsidiaries.
Japan Financial Laws (e) Monitoring of soundness of subsidiaries -Good monitoring of subsidiaries soundness (f) Risk Management -Good risk management as a whole group
United States GrammLeachBliley Act person, promoter, organizer, or sponsor of, or principal underwriter for, a registered management company may serve as custodian of that registered management company. (b) UNIT INVESTMENT TRUSTS.Section 26 of the Investment Company Act of 1940 (15 U.S.C. 80a26) is amended (2) by inserting after subsection (a) the following new subsection: (b) The Commission may, after consultation with and taking into consideration the views of the Federal banking agencies (as defined in section 3 of the Federal Deposit Insurance Act), adopt rules and regulations, and issue orders, consistent with the protection of investors, prescribing the conditions under which a bank, or an affiliated person of a bank, either of which is an affiliated person of a principal underwriter for, or depositor of, a registered unit investment trust, may serve as trustee or custodian under subsection (a)(1).
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United States GrammLeachBliley Act SEC. 231. SUPERVISION OF INVESTMENT BANK HOLDING COMPANIES BY THE SECURITIES AND EXCHANGE COMMISSION. (a) AMENDMENT.Section 17 of the Securities Exchange Act of 1934 (15 U.S.C. 78q) is amended (2) by inserting after subsection (h) the following new subsections: (i) INVESTMENT BANK HOLDING COMPANIES. (1) ELECTIVE SUPERVISION OF AN INVESTMENT BANK HOLDING COMPANY NOT HAVING A BANK OR SAVINGS ASSOCIATION AFFILIATE. (A) IN GENERAL.An investment bank holding company that is not (i) an affiliate of an insured bank (other than an institution described in subparagraph (D), (F), or (G) of section 2(c)(2), or held under section 4(f), of the Bank Holding Company Act of 1956), or a savings association; (ii) a foreign bank, foreign company, or company that is described in section 8(a) of the International Banking Act of
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United States GrammLeachBliley Act 1978; or (iii) a foreign bank that controls, directly or indirectly, a corporation chartered under section 25A of the Federal Reserve Act, may elect to become supervised by filing with the Commission a notice of intention to become supervised, pursuant to subparagraph (B) of this paragraph. Any investment bank holding company filing such a notice shall be supervised in accordance with this section and comply with the rules promulgated by the Commission applicable to supervised investment bank holding companies. (3) SUPERVISION OF INVESTMENT BANK HOLDING COMPANIES. (A) RECORDKEEPING AND REPORTING. (i) IN GENERAL.Every supervised investment bank holding company and each affiliate thereof shall make and keep for prescribed periods such records, furnish copies thereof, and make such reports, as the Commission may require by rule, in order to keep the Commission informed as to (I) the companys or affiliates
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United States GrammLeachBliley Act activities, financial condition, policies, systems for monitoring and controlling financial and operational risks, and transactions and relationships between any broker or dealer affiliate of the supervised investment bank holding company; and (II) the extent to which the company or affiliate has complied with the provisions of this Act and regulations prescribed and orders issued under this Act.
Cross Sector Activity Art. 43 The methods for the business or transaction, promotion for common business, common use of information, operational facilities or business offices between a financial holding company and its subsidiaries or among subsidiaries should not infringe on the rights and interests of customers. Art. 48 When the banking subsidiary of a financial holding company sells financial products with other subsidiaries, its place of business and personnel should be separated and explicitly identified, unless its staff is INTERNATIONAL LAW INSTITUTE
SEC 4. (f) (3) PERMISSIBLE OVERDRAFTS DESCRIBED.-For purposes of paragraph (2)(C), an overdraft is described in this paragraph if-(A) such overdraft results from an inadvertent computer or accounting error that is beyond the control of both the bank and the affiliate; (B) such overdraft-(i) is permitted or incurred on behalf of an affiliate that is monitored by, reports to, and is recognized as a primary dealer by the Federal Reserve Bank of New York; and (ii) is fully secured, as required by the Board, by 147
SEC. 103. FINANCIAL ACTIVITIES. (a) IN GENERAL.Section 4 of the Bank Holding Company Act of 1956 is amended by adding at the end the following new subsections: (k) ENGAGING IN ACTIVITIES THAT ARE FINANCIAL IN NATURE. (1) IN GENERAL. Notwithstanding subsection (a), a financial holding company may engage in any activity, and may acquire and retain the shares of any company engaged in any activity, that the Board, in accordance with paragraph (2), determines (by regulation or FINAL REPORT - 15 DECEMBER 2003
Taiwan Law of Financial Holding Company qualified for the business or product of other subsidiaries. When doing business or selling products, the banking subsidiary or other subsidiaries of a financial holding company should disclose the important content of the business and transaction risks, and clarify whether the business or product is covered by the deposit insurance.
United States Bank Holding Company Law bonds, notes, or other obligations that are direct obligations of the United States or on which the principal and interest are fully guaranteed by the United States or by securities and obligations eligible for settlement on the Federal Reserve book entry system; or (C) such overdraft-(i) is permitted or incurred by, or on behalf of, an affiliate in connection with an activity that is financial in nature or incidental to a financial activity; and (ii) does not cause the bank to violate any provision of section 23A or 23B of the Federal Reserve Act, either directly, in the case of a bank that is a member of the Federal Reserve System, or by virtue of section 18(j) of the Federal Deposit Insurance Act, in the case of a bank that is not a member of the Federal Reserve System. (k) ENGAGING IN ACTIVITIES THAT ARE FINANCIAL IN NATURE.-(1) IN GENERAL.-Notwithstanding subsection (a), a financial holding company 148
United States GrammLeachBliley Act order) (A) to be financial in nature or incidental to such financial activity; or (B) is complementary to a financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. SEC. 107. (a) CROSS MARKETING RESTRICTION.Section 4(f) of the Bank Holding Company Act of 1956 is amended by striking paragraph (3). (3) PERMISSIBLE OVERDRAFTS DESCRIBED.-For purposes of paragraph (2)(C), an overdraft is described in this paragraph if-(A) such overdraft results from an inadvertent computer or accounting error that is beyond the control of both the bank and the affiliate; (B) such overdraft-(i) is permitted or incurred on behalf of an affiliate that is monitored by, reports to, and is recognized as a primary dealer by the Federal Reserve Bank of New York; and (ii) is fully secured, as required by the Board, by
United States Bank Holding Company Law may engage in any activity, and may acquire and retain the shares of any company engaged in any activity, that the Board, in accordance with paragraph (2), determines (by regulation or order)-(A) to be financial in nature or incidental to such financial activity; or (B) is complementary to a financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally.
United States GrammLeachBliley Act bonds, notes, or other obligations that are direct obligations of the United States or on which the principal and interest are fully guaranteed by the United States or by securities and obligations eligible for settlement on the Federal Reserve book entry system; or (C) such overdraft-(i) is permitted or incurred by, or on behalf of, an affiliate in connection with an activity that is financial in nature or incidental to a financial activity; and (ii) does not cause the bank to violate any provision of section 23A or 23B of the Federal Reserve Act, either directly, in the case of a bank that is a member of the Federal Reserve System, or by virtue of section 18(j) of the Federal Deposit Insurance Act, in the case of a bank that is not a member of the Federal Reserve System. SEC. 212. LENDING TO AN AFFILIATED INVESTMENT COMPANY. Section 17(a) of the Investment Company Act of 1940 (15 U.S.C. 80a17(a)) is
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United States GrammLeachBliley Act amended (3) by adding at the end the following new paragraph: (4) to loan money or other property to such registered company, or to any company controlled by such registered company, in contravention of such rules, regulations, or orders as the Commission may, after consultation with and taking into consideration the views of the Federal banking agencies (as defined in section 3 of the Federal Deposit Insurance Act), prescribe or issue consistent with the protection of investors. SEC. 217. REMOVAL OF THE EXCLUSION FROM THE DEFINITION OF INVESTMENT ADVISER FOR BANKS THAT ADVISE INVESTMENT COMPANIES. (a) INVESTMENT ADVISER.Section 202(a)(11)(A) of the Investment Advisers Act of 1940 (15 U.S.C. 80b2(a)(11)(A)) is amended by striking investment company and inserting investment company, except that the term investment adviser includes any bank or
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United States GrammLeachBliley Act bank holding company to the extent that such bank or bank holding company serves or acts as an investment adviser to a registered investment company, but if, in the case of a bank, such services or actions are performed through a separately identifiable department or division, the department or division, and not the bank itself, shall be deemed to be the investment adviser. (b) SEPARATELY IDENTIFIABLE DEPARTMENT OR DIVISION.Section 202(a) of the Investment Advisers Act of 1940 (15 U.S.C. 80b2(a)) is amended by adding at the end the following: (26) The term separately identifiable department or division of a bank means a unit (A) that is under the direct supervision of an officer or officers designated by the board of directors of the bank as responsible for the day-to-day conduct of the banks investment adviser activities for one or more investment companies, including the supervision of all bank employees engaged in the
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United States GrammLeachBliley Act performance of such activities; and (B) for which all of the records relating to its investment adviser activities are separately maintained in or extractable from such units own facilities or the facilities of the bank, and such records are so maintained or otherwise accessible as to permit independent examination and enforcement by the Commission of this Act or the Investment Company Act of 1940 and rules and regulations promulgated under this Act or the Investment Company Act of 1940.. SEC. 221. TREATMENT OF BANK COMMON TRUST FUNDS. (a) SECURITIES ACT OF 1933.Section 3(a)(2) of the Securities Act of 1933 (15 U.S.C. 77c(a)(2)) is amended by striking or any interest or participation in any common trust fund or similar fund maintained by a bank exclusively for the collective investment and reinvestment of assets contributed thereto by such bank in its capacity as trustee, executor, administrator, or guardian and inserting or
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United States GrammLeachBliley Act any interest or participation in any common trust fund or similar fund that is excluded from the definition of the term investment company under section 3(c)(3) of the Investment Company Act of 1940. (b) SECURITIES EXCHANGE ACT OF 1934.Section 3(a)(12)(A)(iii) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(12)(A)(iii)) is amended to read as follows: (iii) any interest or participation in any common trust fund or similar fund that is excluded from the definition of the term investment company under section 3(c)(3) of the Investment Company Act of 1940;. (c) INVESTMENT COMPANY ACT OF 1940.Section 3(c)(3) of the Investment Company Act of 1940 (15 U.S.C. 80a3(c)(3)) is amended by inserting before the period the following: , if (A) such fund is employed by the bank solely as an aid to the administration of trusts, estates, or other accounts created and maintained for a fiduciary purpose; (B) except in connection with the ordinary advertising of the
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United States GrammLeachBliley Act banks fiduciary services, interests in such fund are not (i) advertised; or (ii) offered for sale to the general public; and (C) fees and expenses charged by such fund are not in contravention of fiduciary principles established under applicable Federal or State law. SEC. 302. INSURANCE UNDERWRITING IN NATIONAL BANKS. (a) IN GENERAL.Except as provided in section 303, a national bank and the subsidiaries of a national bank may not provide insurance in a State as principal except that this prohibition shall not apply to authorized products. (b) AUTHORIZED PRODUCTS.For the purposes of this section, a product is authorized if (1) as of January 1, 1999, the Comptroller of the Currency had determined in writing that national banks may provide such product as principal, or national banks were in fact lawfully providing such product as principal; (2) no court of relevant
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United States GrammLeachBliley Act jurisdiction had, by final judgment, overturned a determination of the Comptroller of the Currency that national banks may provide such product as principal; and (3) the product is not title insurance, or an annuity contract the income of which is subject to tax treatment under section 72 of the Internal Revenue Code of 1986. SEC. 401. PREVENTION OF CREATION OF NEW S&L HOLDING COMPANIES WITH COMMERCIAL AFFILIATES. (a) IN GENERAL.Section 10(c) of the Home Owners Loan Act (12 U.S.C. 1467a(c)) is amended by adding at the end the following new paragraph: (9) PREVENTION OF NEW AFFILIATIONS BETWEEN S&L HOLDING COMPANIES AND COMMERCIAL FIRMS. (A) IN GENERAL. Notwithstanding paragraph (3), no company may directly or indirectly, including through any merger, consolidation, or other type of business combination, acquire control of a savings association after May
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United States GrammLeachBliley Act 4, 1999, unless the company is engaged, directly or indirectly (including through a subsidiary other than a savings association), only in activities that are permitted (i) under paragraph (1)(C) or (2) of this subsection; or (ii) for financial holding companies under section 4(k) of the Bank Holding Company Act of 1956. (B) PREVENTION OF NEW COMMERCIAL AFFILIATIONS. Notwithstanding paragraph (3), no savings and loan holding company may engage directly or indirectly (including through a subsidiary other than a savings association) in any activity other than as described in clauses (i) and (ii) of subparagraph (A).
Financial Position Art. 40 The ratio of Capital adequacy, the scope of assets and the method for consolidated calculation in a financial holding company is subject to the regulation of competent authority. Art. 41 For the financial soundness of financial holding
Section 52. 25 To safeguard the soundness of the banking sector, the Prime Minister may, referring to the criteria for the healthy operation of banking holding companies and their subsidiaries, establish, on the basis of the assets held by the bank holding companies, their subsidiaries and particular 156
SEC. 114 (a) COMPTROLLER OF THE CURRENCY. (1) IN GENERAL.The Comptroller of the Currency may, by regulation or order, impose restrictions or requirements on relationships or transactions between a national bank and a subsidiary of the national bank that the
Article 5 Capital adequacy 5.2 The Member States or the competent authorities concerned shall require regulated entities in a financial conglomerate to provide own funds at the level of the financial conglomerate that are always at least equal to the capital adequacy requirements as calculated in
Taiwan Law of Financial Holding Company companies, competent authority may, if it deems necessary, determine the ceiling and floor of the various financial ratio.
Japan Financial Laws linked companies, the requirement on the capital adequacy of the bank holding companies and their subsidiaries.
United States GrammLeachBliley Act Comptroller finds are (A) consistent with the purposes of this Act, title LXII of the Revised Statutes of the United States, and other Federal law applicable to national banks; and (B) appropriate to avoid any significant risk to the safety and soundness of insured depository institutions or any Federal deposit insurance fund or other adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interests, or unsound banking practices. (b) BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM. (1) IN GENERAL.The Board of Governors of the Federal Reserve System may, by regulation or order, impose restrictions or requirements on relationships or transactions (A) between a depository institution subsidiary of a bank holding company and any affiliate of such depository institution (other than a subsidiary of such institution); or (B) between a State member bank and a subsidiary of such bank; if the Board makes a
European Union Financial Conglomerate Directive accordance with Annex I. The Member States or the competent authorities shall also require regulated entities to have in place adequate capital adequacy policies at the level of the financial conglomerate, as well as appropriate internal control mechanisms as regards capital adequacy. 5.5 If the capital adequacy position at the level of the financial conglomerate falls below the requirements as referred to in the first subparagraph of paragraph 2, or if the other requirements set out in paragraph 2 are not met, or where the requirements are met but the solvency may nevertheless be jeopardised, the competent authorities responsible for the supervision of the regulated entities in the financial conglomerate shall ensure that these entities and where appropriate other entities in the group take the necessary measures to rectify the situation as soon as possible.
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United States GrammLeachBliley Act finding described in paragraph (2) with respect to such restriction or requirement. (2) FINDING.The Board of Governors of the Federal Reserve System may exercise authority under paragraph (1) if the Board finds that the exercise of such authority is (A) consistent with the purposes of this Act, the Bank Holding Company Act of 1956, the Federal Reserve Act, and other Federal law applicable to depository institution subsidiaries of bank holding companies or State member banks, as the case may be; and (B) appropriate to prevent an evasion of any provision of law referred to in subparagraph (A) or to avoid any significant risk to the safety and soundness of depository institutions or any Federal deposit insurance fund or other adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interests, or unsound banking practices. (c) FEDERAL DEPOSIT INSURANCE CORPORATION. (1) IN GENERAL.The
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United States GrammLeachBliley Act Federal Deposit Insurance Corporation may, by regulation or order, impose restrictions or requirements on relationships or transactions between a State nonmember bank (as defined in section 3 of the Federal Deposit Insurance Act) and a subsidiary of the State nonmember bank that the Corporation finds are (A) consistent with the purposes of this Act, the Federal Deposit Insurance Act, or other Federal law applicable to State nonmember banks; and (B) appropriate to avoid any significant risk to the safety and soundness of depository institutions or any Federal deposit insurance fund or other adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interests, or unsound banking practices. SEC. 303. TITLE INSURANCE ACTIVITIES OF NATIONAL BANKS AND THEIR AFFILIATES. (a) GENERAL PROHIBITION.No national bank may engage in any activity involving the underwriting or sale of title insurance.
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Taiwan Law of Financial Holding Company Confidentiality and Information Transfer Art. 42 A financial holding company and its subsidiaries should keep secret the personal information of customers, transaction records and other related materials, unless otherwise provided by other laws or competent authority. Competent authority may require a financial holding company and its subsidiaries draft written measures for the confidential materials provided herein, and disclose the important points of the measures in the bulletin, internet or through other methods designated by competent authority.
United States Bank Holding Company Law SEC 5. (2) Notice to state insurance authority or sec required.--If the Board requires a bank holding company, or an affiliate of a bank holding company, that is an insurance company or a broker, dealer, investment company, or investment adviser described in paragraph (1)(A) to provide funds or assets to a depository institution subsidiary of the holding company pursuant to any regulation, order, or other action of the Board referred to in paragraph (1), the Board shall promptly notify the State insurance authority for the insurance company, the Securities and Exchange Commission, or State securities regulator, as the case may be, of such requirement.
European Union Financial Conglomerate Directive 9.1 The competent authorities responsible for the supervision of regulated entities in a financial conglomerate shall cooperate closely. In this regard, competent authorities shall communicate on request all relevant information and shall communicate on their own initiative all essential information. This co-operation shall at least provide for the gathering and the exchange of information with regard to the following items : (a) identification of the group structure, of all major entities belonging to the financial conglomerate, as well as of the competent authorities of the regulated entities in the group ; (b) the financial conglomerate's strategic policies, including important acquisitions and restructurings ; (c) the financial situation of the financial conglomerate, in particular on capital adequacy, intra-group transactions, risk concentration and profitability ; (d) the financial conglomerate's major shareholders and management ; (e) the organisation, risk
Banking Law Section 52. 29 (1) Bank holding companies should, as provided by Cabinet ordinance, compile annually their statements including the business and assets conditions of the bank holding companies and their subsidiaries, which should be available for public in the business place of the subsidiaries. (3) besides the items provided above, bank holding companies should disclose as fully as possible for depositors and other customers the materials on business and assets condition of themselves and their subsidiaries
SEC. 204. INFORMATION SHARING. Section 18 of the Federal Deposit Insurance Act is amended by adding at the end the following new subsection: (t) RECORDKEEPING REQUIREMENTS. (1) REQUIREMENTS.Each appropriate Federal banking agency, after consultation with and consideration of the views of the Commission, shall establish recordkeeping requirements for banks relying on exceptions contained in paragraphs (4) and (5) of section 3(a) of the Securities Exchange Act of 1934. Such recordkeeping requirements shall be sufficient to demonstrate compliance with the terms of such exceptions and be designed to facilitate compliance with such exceptions. (2) AVAILABILITY TO COMMISSION; CONFIDENTIALITY.Each appropriate Federal banking agency shall make any information required under paragraph (1) available to the Commission upon request. Notwithstanding any other
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United States GrammLeachBliley Act provision of law, the Commission shall not be compelled to disclose any such information. Nothing in this paragraph shall authorize the Commission to withhold information from Congress, or prevent the Commission from complying with a request for information from any other Federal department or agency or any selfregulatory organization requesting the information for purposes within the scope of its jurisdiction, or complying with an order of a court of the United States in an action brought by the United States or the Commission. For purposes of section 552 of title 5, United States Code, this paragraph shall be considered a statute described in subsection (b)(3)(B) of such section 552. (3) DEFINITION.As used in this subsection the term Commission means the Securities and Exchange Commission. SEC. 214. ADDITIONAL SEC DISCLOSURE AUTHORITY. Section 35(a) of the Investment Company Act of 1940 (15 U.S.C. 80a34(a)) is amended
European Union Financial Conglomerate Directive management and internal control systems at financial conglomerate level ; (f) procedures for the collection of information from the entities in a financial conglomerate, and the verification of this information ; (g) adverse developments in regulated entities or in other entities of the financial conglomerate that could seriously affect the regulated entities ; (h) major sanctions and exceptional measures taken by competent authorities in accordance with sectoral rules or the provisions of this Directive. The competent authorities concerned shall prior to their decision consult each other with regard to the following items, where these decisions are of importance for other competent authorities supervisory tasks: (a) changes in the shareholder, organisational or management structure of regulated entities in a financial conglomerate, that require the approval or authorisation of competent authorities ; (b) major sanctions or
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United States GrammLeachBliley Act to read as follows: (2) DISCLOSURES.Any person issuing or selling the securities of a registered investment company that is advised by, or sold through, a bank shall prominently disclose that an investment in the company is not insured by the Federal Deposit Insurance Corporation or any other government agency. The Commission may, after consultation with and taking into consideration the views of the Federal banking agencies (as defined in section 3 of the Federal Deposit Insurance Act), adopt rules and regulations, and issue orders, consistent with the protection of investors, prescribing the manner in which the disclosure under this paragraph shall be provided. SEC. 220. INTERAGENCY CONSULTATION. The Investment Advisers Act of 1940 (15 U.S.C. 80b1 et seq.) is amended by inserting after section 210 the following new section: SEC. 210A. CONSULTATION. (a) EXAMINATION
European Union Financial Conglomerate Directive exceptional measures taken by competent authorities. 9.2 The co-ordinator may invite the competent authorities of the Member State in which a parent undertaking is located, and which do not themselves exercise the supplementary supervision pursuant to Article 7, to ask the parent undertaking for any information which would be relevant for the exercise of its co-ordination tasks as laid down in Article 8, and to transmit that information to the co-ordinator. 9.3 Information received in the framework of the supplementary supervision and in particular any exchange of information between competent authorities and between competent authorities and other authorities which is provided for in this Directive, shall be subject to the provisions of professional secrecy and communication of confidential information laid down in the sectoral rules. 11.2 Member States shall provide that their competent authorities responsible for exercising supplementary
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United States GrammLeachBliley Act RESULTS AND OTHER INFORMATION. (1) The appropriate Federal banking agency shall provide the Commission upon request the results of any examination, reports, records, or other information to which such agency may have access (A) with respect to the investment advisory activities of any (i) bank holding company; (ii) bank; or (iii) separately identifiable department or division of a bank, that is registered under section 203 of this title; and (B) in the case of a bank holding company or bank that has a subsidiary or a separately identifiable department or division registered under that section, with respect to the investment advisory activities of such bank or bank holding company. (2) The Commission shall provide to the appropriate Federal banking agency upon request the results of any examination, reports, records, or other information with respect to the investment advisory activities of any bank holding company, bank, or separately
European Union Financial Conglomerate Directive supervision shall, by approaching the entities in a financial conglomerate either directly or indirectly, have access to any information that would be relevant for the purposes of supplementary supervision.
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United States GrammLeachBliley Act identifiable department or division of a bank, which is registered under section 203 of this title. (3) Notwithstanding any other provision of law, the Commission and the appropriate Federal banking agencies shall not be compelled to disclose any information provided under paragraph (1) or (2). Nothing in this paragraph shall authorize the Commission or such agencies to withhold information from Congress, or prevent the Commission or such agencies from complying with a request for information from any other Federal department or agency or any self-regulatory organization requesting the information for purposes within the scope of its jurisdiction, or complying with an order of a court of the United States in an action brought by the United States, the Commission, or such agencies. For purposes of section 552 of title 5, United States Code, this paragraph shall be considered a statute described in subsection (b)(3)(B) of such section 552. (b) EFFECT ON OTHER AUTHORITY.Nothing in this section shall limit in any respect
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United States GrammLeachBliley Act the authority of the appropriate Federal banking agency with respect to such bank holding company (or affiliates or subsidiaries thereof), bank, or ubsidiary, department, or division or a bank under any other provision of law. SEC. 231. SUPERVISION OF INVESTMENT BANK HOLDING COMPANIES BY THE SECURITIES AND EXCHANGE COMMISSION. (j) AUTHORITY TO LIMIT DISCLOSURE OF INFORMATION. Notwithstanding any other provision of law, the Commission shall not be compelled to disclose any information required to be reported under subsection (h) or (i) or any information supplied to the Commission by any domestic or foreign regulatory agency that relates to the financial or operational condition of any associated person of a broker or dealer, investment bank holding company, or any affiliate of an investment bank holding company. Nothing in this subsection shall authorize the Commission to withhold
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United States GrammLeachBliley Act information from Congress, or prevent the Commission from complying with a request for information from any other Federal department or agency or any self-regulatory organization requesting the information for purposes within the scope of its jurisdiction, or complying with an order of a court of the United States in an action brought by the United States or the Commission. For purposes of section 552 of title 5, United States Code, this subsection shall be considered a statute described in subsection (b)(3)(B) of such section 552. In prescribing regulations to carry out the requirements of this subsection, the Commission shall designate information described in or obtained pursuant to subparagraphs (A), (B), and (C) of subsection (i)(5) as confidential information for purposes of section 24(b)(2) of this title.. SEC. 307. INTERAGENCY CONSULTATION. (b) EXAMINATION RESULTS AND OTHER INFORMATION. (1) INFORMATION OF THE
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United States GrammLeachBliley Act BOARD.Upon the request of the appropriate insurance regulator of any State, the Board may provide any information of the Board regarding the financial condition, risk management policies, and operations of any financial holding company that controls a company that is engaged in insurance activities and is regulated by such State insurance regulator, and regarding any transaction or relationship between such an insurance company and any affiliated depository institution. The Board may provide any other information to the appropriate State insurance regulator that the Board believes is necessary or appropriate to permit the State insurance regulator to administer and enforce applicable State insurance laws. (2) BANKING AGENCY INFORMATION.Upon the request of the appropriate insurance regulator of any State, the appropriate Federal banking agency may provide any information of the agency regarding any transaction or relationship between a depository institution supervised
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United States GrammLeachBliley Act by such Federal banking agency and any affiliated company that is engaged in insurance activities regulated by such State insurance regulator. The appropriate Federal banking agency may provide any other information to the appropriate State insurance regulator that the agency believes is necessary or appropriate to permit the State insurance regulator to administer and enforce applicable State insurance laws. (3) STATE INSURANCE REGULATOR INFORMATION.Upon the request of the Board or the appropriate Federal banking agency, a State insurance regulator may provide any examination or other reports, records, or other information to which such insurance regulator may have access with respect to a company which (A) is engaged in insurance activities and regulated by such insurance regulator; and (B) is an affiliate of a depository institution or financial holding company. SEC. 501. PROTECTION OF NONPUBLIC PERSONAL INFORMATION.
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United States GrammLeachBliley Act (a) PRIVACY OBLIGATION POLICY.It is the policy of the Congress that each financial institution has an affirmative and continuing obligation to respect the privacy of its customers and to protect the security and confidentiality of those customers nonpublic personal information. (b) FINANCIAL INSTITUTIONS SAFEGUARDS.In furtherance of the policy in subsection (a), each agency or authority described in section 505(a) shall establish appropriate standards for the financial institutions subject to their jurisdiction relating to administrative, technical, and physical safeguards (1) to insure the security and confidentiality of customer records and information; (2) to protect against any anticipated threats or hazards to the security or integrity of such records; and (3) to protect against unauthorized access to or use of such records or information which could result in substantial harm or inconvenience to any customer.
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United States GrammLeachBliley Act SEC. 502. OBLIGATIONS WITH RESPECT TO DISCLOSURES OF PERSONAL INFORMATION. (a) NOTICE REQUIREMENTS.Except as otherwise provided in this subtitle, a financial institution may not, directly or through any affiliate, disclose to a nonaffiliated third party any nonpublic personal information, unless such financial institution provides or has provided to the consumer a notice that complies with section 503. (b) OPT OUT. (1) IN GENERAL.A financial institution may not disclose nonpublic personal information to a nonaffiliated third party unless (A) such financial institution clearly and conspicuously discloses to the consumer, in writing or in electronic form or other form permitted by the regulations prescribed under section 504, that such information may be disclosed to such third party; (B) the consumer is given the opportunity, before the time that such information is initially disclosed, to direct that such
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United States GrammLeachBliley Act information not be disclosed to such third party; and (C) the consumer is given an explanation of how the consumer can exercise that nondisclosure option. (2) EXCEPTION.This subsection shall not prevent a financial institution from providing nonpublic personal information to a nonaffiliated third party to perform services for or functions on behalf of the financial institution, including marketing of the financial institutions own products or services, or financial products or services offered pursuant to joint agreements between two or more financial institutions that comply with the requirements imposed by the regulations prescribed under section 504, if the financial institution fully discloses the providing of such information and enters into a contractual agreement with the third party that requires the third party to maintain the confidentiality of such information.
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SECTION 4 COMPARATIVE EXAMINATION TABLE INTER-AGENCY COOPERATION AND MEMORANDA OF UNDERSTANDING
IOSCO Multilateral Memoranda of Understanding
Basel Committee Essential elements of a statement of mutual cooperation This note sets out the essential elements of a statement of mutual cooperation designed to establish arrangements for the sharing of information between the supervisors of country A and country B to facilitate the performance of their respective duties and to promote the safe and sound functioning of financial institutions with cross-border establishments in their respective countries. The statement should demonstrate the commitment of the supervisors in country A and country B to the principles of effective consolidated supervision and cooperation between banking supervisors, and to their respective responsibilities, as laid down in the Basel Committee's Concordat and Core Principles for Effective Banking Supervision. The supervisors in country A and country B should express, through these arrangements, their willingness to cooperate with each other on the basis of mutual trust and understanding in the supervision of crossborder establishments within their respective
UK Memorandum of Understanding Between HM Treasury, the Bank of England and the FSA 1 This Memorandum of Understanding establishes a framework for co-operation between HM Treasury, the Bank of England and the FSA in the field of financial stability. It sets out the role of each institution, and explains how they will work together towards the common objective of financial stability. The division of responsibilities is based on four guiding principles: clear accountability. Each institution must be accountable for its actions, so each must have unambiguous and well-defined responsibilities; transparency. Parliament, the markets and the public must know who is responsible for what; no duplication. Each institution must have a clearly defined role, to avoid second guessing, inefficiency and the duplication of effort. This will help ensure proper accountability; regular information exchange. This will help each institution to discharge its responsibilities as efficiently and effectively as possible. The Banks 173
Memorandum of Understanding Between the Securities and Futures Commission and the Hong Kong Monetary Authority I. Purpose 1. This Memorandum of Understanding (MoU) aims to:(a) replace and supersede the previous MoU, signed on 23 October 1995, between the Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) (each referred to as a party, together as parties), in view of the new regulatory regime to be implemented under the Securities and Futures Ordinance (Cap.571) (SFO) and the Banking Ordinance (Cap.155) (BO) as amended by the Banking (Amendment) Ordinance 2002 (6 of 2002) (BAO 2002); (b) set out the roles and responsibilities of the SFC and the HKMA, respectively, under each major functional aspect of the new regulatory regime as well as the arrangements between the parties in relations to the exchange of relevant information and notification or referral of relevant matters; (c) achieve the regulatory objective that all intermediaries carrying
Draft Provisions Relating to Duties and Functions of Regulatory and Supervisory Authorities PART I Purposes, Scope and Definitions Purpose and Scope Article 1 The purpose of this Law is to determine the principles and procedures relating to regulatory and supervisory institutions set up with administrative and financial autonomy under special laws. Definitions Article 2 In the implementation of this Law, a) Board means a decision making organ appointed and authorised to carry out regulation and supervision in areas determined by its establishment legislation, using its authority under its own responsibility and accountable within the principles set out in this law. b) Institution means an organisation created, based on the principle of expertise, possessing natural legal identity and administrative and financial autonomy in order to implement its duties and responsibilities as set out in the related laws and to
PURPOSE The signatories to this IOSCO Multilateral Memorandum of Understanding: Considering the increasing international activity in the securities and derivatives markets, and the corresponding need for mutual cooperation and consultation among IOSCO Members to ensure compliance with, and enforcement of, their securities and derivatives laws and regulations; Considering the events of September 11, 2001, which underscore the importance of expanding cooperation among IOSCO Members; Desiring to provide one another with the fullest mutual assistance possible to facilitate the performance of the functions with which they are entrusted within their respective jurisdictions to enforce or secure compliance with their laws and regulations as those terms are defined herein, Have reached the following understanding: DEFINITIONS For the purposes of this IOSCO Multilateral Memorandum of Understanding: 1. "Authority" means
APPENDIX F FINANCIAL CONGLOMERATES SECTION 4 IOSCO Multilateral Memoranda of Understanding Basel Committee Essential elements of a statement of mutual cooperation jurisdictions. A crossborder establishment is defined to include a branch, a subsidiary or any other entity within the jurisdictions which gives rise to the need for consolidated supervision. The supervisors in country A and country B should recognise the complementary character of their supervision of a cross-border establishment. In accordance with the Core Principles, each supervisor should assess the nature and extent of the supervision conducted by the other party, so as to determine the extent of reliance that can be placed on that supervision. Sharing of information The statement should recognise that information should be shared between the relevant authorities in country A and country B in order to facilitate effective consolidated supervision of financial institutions operating across their national borders. Informationsharing should include contact during the authorisation and licensing process, in the supervision of the ongoing activities of such entities and in the handling of problem institutions. In connection with the authorisation process, and in accordance with
PRC 3890 BANKING LAWS AND REGULATIONS Memorandum of Understanding Between the Securities and Futures Commission and the Hong Kong Monetary Authority out regulated activities in Hong Kong are subject to consistent regulatory measures, irrespective of whether they are supervised by the SFC or the HKMA; and (d) strengthen cooperation between the SFC and the HKMA. II. Definition of terms 2. Unless otherwise specified, terms defined in the SFO and the BAO 2002 bear the same meaning when used in this MoU. III PRINCIPLES 3. The parties will use their best endeavours to meet the terms of this MoU. Also, each party will make reasonable efforts to ensure that the other party is provided with all relevant information so that the parties may effectively perform their respective statutory functions. 4.In addition, the parties recognise the following overriding principles:(a) this MoU, of which Annex A and Annex B are an integral part, does not modify or supersede any law or regulation; (b)this MoU docs not detract from the statutory functions of the parties; (c)this MoU docs not amount to a delegation of any of the powers, duties and obligations of the parties; (d)this MoU docs not create any rights, Draft Provisions Relating to Duties and Functions of Regulatory and Supervisory Authorities execute the other duties assigned to it, which is responsible for the implementation of its board decisions and whose scope is determined in article one of this Law, c) Related law means the law of establishment of the institution PART II Institution and Board Structure of the Institution Article 3 Institutions possessing natural legal identity and administrative and financial autonomy in order to implement their duties and responsibilities as set out in the related laws and to execute the other duties assigned to them, within the framework of the general principles identified in the establishment law, can be formed. The authority to which institutions are related will be identified in their establishment legislation. The institutions are independent in their operation. No organ, office, authority or person can give an order or instruction aimed at influencing the final decision of the
UK Memorandum of Understanding Between HM Treasury, the Bank of England and the FSA responsibilities 2 The Bank will be responsible for the overall stability of the financial system as a whole which will involve: i) stability of the monetary system. The Bank will monitor this, as part of its monetary policy functions. It will act daily in the markets, to deal with day to day fluctuations in liquidity; ii) financial system infrastructure, in particular payments systems at home and abroad. As the bankers bank, the Bank will stand at the heart of the system. It will fall to the Bank to advise the Chancellor, and answer for its advice, on any major problem inherent in the payments systems. The Bank will also be closely involved in developing and improving the infrastructure, and strengthening the system to help reduce systemic risk; iii) broad overview of the system as a whole. The Bank will be uniquely placed to do this: it will be responsible for monetary stability, and will have high level representation at the institution responsible for financial regulation (through the Deputy Governor (financial stability), who will be a member of the FSA 174
those regulators listed in Appendix A, who, in accordance with the procedures set forth in Appendix B, have signed this Memorandum of Understanding. 2. "Requested Authority" means an Authority to whom a request for assistance is made under this Memorandum of Understanding. 3. "Requesting Authority" means an Authority making a request for assistance under this Memorandum of Understanding. 4. Laws and Regulations mean the provisions of the laws of the jurisdictions of the Authorities, the regulations promulgated thereunder, and other regulatory requirements that fall within the competence of the Authorities, concerning the following: a. insider dealing, market manipulation, misrepresentation of material information and other fraudulent or manipulative practices relating to securities and derivatives, including solicitation practices, handling of investor funds and customer orders; b. the registration, issuance, offer, or sale of securities and derivatives, and reporting requirements related thereto; c. market intermediaries,
APPENDIX F FINANCIAL CONGLOMERATES SECTION 4 IOSCO Multilateral Memoranda of Understanding Basel Committee Essential elements of a statement of mutual cooperation the Core Principles: (a) the host supervisor should notify the home supervisor, without delay, of applications for approval to establish offices or make acquisitions in the host jurisdiction; (b) upon request, the home supervisor should inform the host supervisor whether the applicant bank is in substantial compliance with banking laws and regulations and whether the bank may be expected, given its administrative structure and internal controls, to manage the cross-border establishment in an orderly manner. The home supervisor should also, upon request, assist the host supervisor by verifying or supplementing any information submitted by the applicant bank; (c) the home supervisor should inform the host supervisor about the nature of its regulatory system and the extent to which it will conduct consolidated supervision over the applicant bank. Similarly, the host supervisor should indicate the scope of its supervision and indicate any specific features that might give rise to the need for special arrangements; and (d) to the extent permitted by law, the home and host
PRC 3890 BANKING LAWS AND REGULATIONS Memorandum of Understanding Between the Securities and Futures Commission and the Hong Kong Monetary Authority obligations or liabilities, enforceable by the parties or by any third party; and (e)this MoU does not affect any arrangements under any other MoU that either party has entered into or may enter into with any other party, and this MoU shall be construed accordingly. IV SCOPE 5.1 Under the SFO:(a)authorized financial institutions ("Als") carrying on regulated activities in Hong Kong must be registered by the SFC ("registered institutions") and are then, together with their associated entities, supervised by the HKMA and otherwise regulated jointly by the SFC and the HKMA; (b)other intermediaries carrying on regulated activities in Hong Kong must be licensed by the SFC and, together with their associated entities, are then regulated solely by the SFC. 5.2 This MoU:(a)sets out the regulatory and supervisory roles and responsibilities of the parties, respectively, with regard to registered institutions and their associated entities as well as AIs that are associated entities of intermediaries; (b)establishes the channels and mechanism for the exchange of Draft Provisions Relating to Duties and Functions of Regulatory and Supervisory Authorities institution. The institutions organisation consists of: 1) Board 2) Presidency 3) Service Units The composition, appointment and qualities required for appointment of the Board Article 4 The Board consists of seven members, of whom one is the Chairman, and one the deputy chairman. The chairman and the members are appointed by the Council of Ministers. The members of the Board choose the vice-Chairman from among themselves. The following qualities and characteristics will be sought in the Chairman and members of the Board: a) They must be specialised in the sector in which the institution will operate, and must have distinguished themselves in their profession: b) They must have a least ten years experience in the public and/or private sector in relation to their profession; c) They must be graduates of domestic or
UK Memorandum of Understanding Between HM Treasury, the Bank of England and the FSA Board). Through its involvement in the payments systems it may be the first to spot potential problems. The Bank will be able to advise on the implications for financial stability of developments in the domestic and international markets and payments systems; and it will assess the impact on monetary conditions of events in the financial sector; iv) being able in exceptional circumstances to undertake official financial operations, in accordance with the arrangements in paragraphs 11 to 13 of this Memorandum, in order to limit the risk of problems in or affecting particular institutions spreading to other parts of the financial system; v) the efficiency and effectiveness of the financial sector, with particular regard to international competitiveness. The Bank will continue to play its leading role in promoting the City. Much of this work will be directed towards improving the infrastructure. The FSAs responsibilities 3 The FSAs powers and responsibilities will be set out in statute. It will be responsible for: i) the authorisation and 175
including investment and trading advisers who are required to be licensed or registered, collective investment schemes, brokers, dealers, and transfer agents; and d. markets, exchanges, and clearing and settlement entities. 5. "Person" means a natural or legal person, or unincorporated entity or association, including corporations and partnerships. MUTUAL ASSISTANCE AND THE EXCHANGE OF INFORMATION 6. General Principles regarding Mutual Assistance and the Exchange of Information (a) This Memorandum of Understanding sets forth the Authorities' intent with regard to mutual assistance and the exchange of information for the purpose of enforcing and securing compliance with the respective Laws and Regulations of the jurisdictions of the Authorities. The provisions of this Memorandum of Understanding are not intended to create legally binding obligations or supersede domestic laws. (b) The Authorities represent that no domestic secrecy or blocking laws or regulations should prevent the collection or
APPENDIX F FINANCIAL CONGLOMERATES SECTION 4 IOSCO Multilateral Memoranda of Understanding Basel Committee Essential elements of a statement of mutual cooperation supervisors should share information on the fitness and properness of prospective directors, managers and relevant shareholders of a crossborder establishment. In connection with the ongoing supervision of their cross-border establishments, the two supervisors should: (a) provide relevant information to their counterpart regarding material developments or supervisory concerns in respect of the operations of a cross-border establishment; (b) respond to requests for information on their respective national regulatory systems and inform each other about major changes, in particular those which have a significant bearing on the activities of cross-border establishments; (c) inform their counterpart of material administrative penalties imposed, or other formal enforcement action taken, against a crossborder establishment. Prior notification shall be made, as far as practicable and subject to applicable laws; and (d) facilitate the transmission of any other relevant information that might be required to assist with the supervisory process. Requests for information should normally be made
PRC 3890 BANKING LAWS AND REGULATIONS Memorandum of Understanding Between the Securities and Futures Commission and the Hong Kong Monetary Authority information between the parties; and (c)addresses relevant staff training and development matters. V RESPECTIVE ROLES WITH REGARD TO THE REGULATED ACTIVITIES OF REGISTERED INSTITUTIONS 6.Registration 6.1 Granting Certificates of Registration 6.1.1 The SFC is responsible for granting or refusing applications by AIs to be registered to carry on a regulated activity. All such applications received by the SFC will be referred to the HKMA for consideration. 6.1.2 The HKMA will consult the SFC on the merits of any such application and will advise the SFC whether it is satisfied that the applicant is fit and proper to be so registered. In considering whether an applicant is fit and proper to be registered, the HKMA will take into account:(a)the factors set out in section 129 of the SFO; and (b)any relevant rules, codes, guidelines or guidance made or published by the SFC under the SFO. 6.1.3 The parties will endeavour to ensure that Draft Provisions Relating to Duties and Functions of Regulatory and Supervisory Authorities foreign institutions providing four years of higher education in the areas of law, economics, management, finance, public administration, international relations and engineering or must have completed a masters degree in one of these areas; d) They must meet the conditions specified in clauses 1,4,5,6 and 7 of paragraph (A) of article 48 of the Civil Servants Law no. 657. The professional careers and selection reasons for the appointment of Board members will be set out in the justification of the decision of the Council of Ministers.
UK Memorandum of Understanding Between HM Treasury, the Bank of England and the FSA prudential supervision of banks, building societies, investment firms, insurance companies and friendly societies; ii) the supervision of financial markets and of clearing and settlement systems; iii) the conduct of operations in response to problem cases affecting firms, markets and clearing and settlements systems within its responsibilities, where: a) the nature of the operations has been agreed according to the provisions of paragraphs 11 to 13 of the Memorandum; and b) the operations do not fall within the ambit of the Bank of England defined in paragraph 2 above. (Such operations by the FSA may include, but would not be restricted to, the changing of capital or other regulatory requirements and the facilitation of a market solution involving, for example, an introduction of new capital into a troubled firm by one or more third parties.) iv) regulatory policy in these areas. The FSA will advise on the regulatory implication for firms, markets and clearing systems of developments in domestic and international markets and of initiatives, both domestic and 176
provision of the information set forth in 7(b) to the Requesting Authority. (c) This Memorandum of Understanding does not authorize or prohibit an Authority from taking measures other than those identified herein to obtain information necessary to ensure enforcement of, or compliance with, the Laws and Regulations applicable in its jurisdiction. (d) This Memorandum of Understanding does not confer upon any Person not an Authority, the right or ability, directly or indirectly to obtain, suppress or exclude any information or to challenge the execution of a request for assistance under this Memorandum of Understanding. (e) The Authorities recognize the importance and desirability of providing mutual assistance and exchanging information for the purpose of enforcing, and securing compliance with, the Laws and Regulations applicable in their respective jurisdictions. A request for assistance may be denied by the Requested Authority: (i) where the request would require the Requested Authority to act in a manner that would violate domestic
Duration of appointment Article 5 The Board Chairman and members will serve for a period of five years. A Chairman and members whose tenure is ending can be appointed for at most one more term. If a position as Chairman or member is vacated for any reason before the end of the term, an appointment to the vacant position can be made within a month. In this case, the appointed person will serve out the term of the person who left. The Board Chairman or members cannot end
APPENDIX F FINANCIAL CONGLOMERATES SECTION 4 IOSCO Multilateral Memoranda of Understanding Basel Committee Essential elements of a statement of mutual cooperation in writing. However, where the supervisory authorities perceive a need for expedited action, requests may be initiated in any form but should be confirmed subsequently in writing. On-site inspections The statement should recognise that cooperation is particularly useful to the supervisors of country A and country B in assisting each other in carrying out on-site inspections of crossborder establishments in the host country. Prior to deciding whether an onsite inspection is necessary, the home supervisor should review any relevant examination or other supervisory reports prepared by host supervisors. The home supervisor should notify the host supervisor of plans to examine a crossborder establishment or to appoint a third party to conduct an examination on its behalf, and to indicate the purposes and scope of the visit. The host supervisor should allow the home supervisor or its delegated agent to conduct on-site inspections. As may be mutually agreed between the parties, examinations may be carried out by the home supervisor alone, or accompanied by the host supervisor.
PRC 3890 BANKING LAWS AND REGULATIONS Memorandum of Understanding Between the Securities and Futures Commission and the Hong Kong Monetary Authority the referral and consultation process is as expeditious as possible and that the approach adopted in processing applications for registration is consistent with that adopted in processing licence applications. 6.1.4 For the purposes of clause 6.1.3, the parties will follow the procedures set out at Annex A. 6.1.5 The SFC will have regard to the HKMA's advice, referred to in clause 6.1.2, and may rely wholly or partly on it in deciding whether or not to register an applicant. 6.1.6 The SFC will consult the HKMA before imposing any conditions on the registration of a registered institution. The SFC will also consult the HKMA before exercising its power to amend or revoke any condition of registration or to impose any new condition on such registration. 6.1.7 The parties will maintain a close dialogue throughout the application process and ensure that a sufficient record of their communications in this regard is maintained. 6.2 Giving Consent to the Appointment of Executive Officers 6.2.1 The HKMA is Draft Provisions Relating to Duties and Functions of Regulatory and Supervisory Authorities their tenure for any reason before its completion. However, where it is understood that they no longer meet the conditions necessary for appointment, or where their status is understood to be in contravention of article 6, or where they have been ruled to have committed crimes in relation to the duties to which they were appointed by law, the appointments of a Chairman or a member will end under the same procedures by which they were appointed. Prohibitions Article 6 - The Board Chairman or members cannot take up any official or private duties not based on law; cannot become involved in trade; cannot be shareholders in companies involved in the sector which they are charged with regulating; neither themselves nor their blood relatives to the third degree and relatives by marriage to the second degree can be involved in trading activity in this sector for the duration of their term as Chairman or member and for two years following the end of this term, can establish a consultancy or shareholding relationship, or can even take up work or duties,
UK Memorandum of Understanding Between HM Treasury, the Bank of England and the FSA international, such as EC directives. The Treasurys responsibilities 4 The Treasury is responsible for the overall institutional structure of regulation, and the legislation which governs it. It has no operational responsibility for the activities of the FSA and the Bank, and will not be involved in them. But there are a variety of circumstances where the FSA and the Bank will need to alert the Treasury about possible problems: for example, where a serious problem arises, which could cause wider economic disruption; where there is or could be a need for a support operation; where diplomatic or foreign relations problems might arise; where a problem might suggest the need for a change in the law; or where a case is likely to lead to questions to Ministers in Parliament. This list is not exhaustive, and there will be other relevant situations. In each case it will be for the FSA and the Bank to decide whether the Treasury needs to be alerted. Information gathering 5 Through the exercise of its statutory responsibilities, the FSA will gather a wide range of information and data on the firms which it 177
law; (ii) where a criminal proceeding has already been initiated in the jurisdiction of the Requested Authority based upon the same facts and against the same Persons, or the same Persons have already been the subject of final punitive sanctions on the same charges by the competent authorities of the jurisdiction of the Requested Authority, unless the Requesting Authority can demonstrate that the relief or sanctions sought in any proceedings initiated by the Requesting Authority would not be of the same nature or duplicative of any relief or sanctions obtained in the jurisdiction of the Requested Authority. (iii) where the request is not made in accordance with the provisions of this Memorandum of Understanding; or (iv) on grounds of public interest or essential national interest. Where a request for assistance is denied, or where assistance is not available under domestic law, the Requested Authority will provide the reasons for not granting the assistance and consult pursuant to paragraph 12. 7. Scope of Assistance (a) The Authorities will,
APPENDIX F FINANCIAL CONGLOMERATES SECTION 4 IOSCO Multilateral Memoranda of Understanding Basel Committee Essential elements of a statement of mutual cooperation Following the inspection, an exchange of views should take place between the examination team and the host supervisor. Protection of information The statement should recognise that mutual trust between supervisory authorities can only be achieved if exchanges of information can flow with confidence in both directions. The supervisor receiving the information must provide the assurance that all possible steps will be taken to preserve the confidentiality of the information received. In this regard, employees of supervisory authorities should be bound to hold confidential all information obtained in the course of their duties. Any confidential information received from the other supervisor should be used exclusively for lawful supervisory purposes. A supervisor in one jurisdiction that has received confidential information from a supervisor in another jurisdiction may subsequently receive a request for that information from a third party, including a third party supervisory authority, who has a legitimate common interest in the matter. Prior to passing
PRC 3890 BANKING LAWS AND REGULATIONS Memorandum of Understanding Between the Securities and Futures Commission and the Hong Kong Monetary Authority responsible for giving or refusing to give consent to individuals to be executive officers of registered institutions. 6.2.2 In so deciding, the HKMA will consider:(a) whether an individual concerned is fit and proper for the purpose, taking into account the factors set out in section 129 of the SFO and any relevant rules, codes, guidelines or guidance made or published by the SFC; and (b) whether the individual has sufficient authority within the relevant registered institution to be such an executive officer. 6.3 Maintaining Registers 6.3.1 The SFC is responsible for maintaining a register of licensed persons and registered institutions, which includes, among other things, details of the responsible officers of licensed corporations and of the executive officers of registered institutions and for making such register available for public inspection. 6.3.2 The HKMA is responsible for maintaining a register of individuals ("relevant individuals") who perform any regulated function in any regulated activity for or Draft Provisions Relating to Duties and Functions of Regulatory and Supervisory Authorities commit to undertakings, or become a commissioner or representative. Prior to taking up their positions, the Board Chairman and members are compelled to get rid of stocks and shares in the form of capital market holdings which they own, except for the list of debt securities issued by the Treasury, by selling them or transferring them to persons other than their blood relatives up to the third degree and relatives by marriage up to the second degree. Members who do not act in line with this provision within thirty days will be counted as having withdrawn their membership. The provisions of paragraph one and two will be applied also to those who are appointed to the institution in return for a wage or allocation, or by proxy, with a job contract and similar working agreement. The members of the board and other personnel cannot make known confidential information related to the institution or trade secrets learned during the implementation of this Law even if they have left the institution, and cannot use such
UK Memorandum of Understanding Between HM Treasury, the Bank of England and the FSA authorises and supervises. 6 The FSA and the Bank will work together to avoid separate collection of the same data, to minimise the burden on firms. Where both need access to the same information, they will reach agreement as to who should collect it, and how it should be transmitted to the other. 7 The Bank will collect the data and information which it needs to discharge its responsibilities. Information exchange 8 This will take place on several levels. The Banks Deputy Governor (financial stability) will be a member of the FSA Board, and the FSA Chairman will sit on the Court of the Bank of England. At all levels, there will be close and regular contact between the FSA and the Bank. The FSA and the Bank will establish a programme of secondments between the two institutions, to strengthen the links and foster a culture of cooperation. 9 The FSA and the Bank will establish information sharing arrangements, to ensure that all information which is or may be relevant to the discharge of their respective responsibilities will be shared fully and freely. 178
within the framework of this Memorandum of Understanding, provide each other with the fullest assistance permissible to secure compliance with the respective Laws and Regulations of the Authorities. (b) The assistance available under this Memorandum of Understanding includes, without limitation: (i) providing information and documents held in the files of the Requested Authority regarding the matters set forth in the request for assistance; (ii) obtaining information and documents regarding the matters set forth in the request for assistance, including: contemporaneous records sufficient to reconstruct all securities and derivatives transactions, including records of all funds and assets transferred into and out of bank and brokerage accounts relating to these transactions; records that identify: the beneficial owner and controller, and for each transaction, the account holder; the amount purchased or sold; the time of the transaction; the price of the transaction; and the individual and the bank or broker and brokerage house that handled the transaction; and information identifying
APPENDIX F FINANCIAL CONGLOMERATES SECTION 4 IOSCO Multilateral Memoranda of Understanding Basel Committee Essential elements of a statement of mutual cooperation information to the third party, the recipient should consult with and seek agreement from the supervisor that originated the information, who may attach conditions to the release of information, including whether the intended additional recipient is or can be bound to hold the information confidential. In the event that a supervisor is legally compelled to disclose to a third party, including a third party supervisory authority, information that has been provided in accordance with a statement of mutual cooperation, this supervisor should promptly notify the supervisor that originated the information, indicating what information it is compelled to release and the circumstances surrounding its release. If so required by the originating supervisor, the supervisor will use its best endeavours to preserve the confidentiality of the information to the extent permitted by law. Supervisors should inform their counterparts of the circumstances in which they may be subject to legal compulsion to release information obtained. Ongoing Coordination The statement should recognise that visits for
PRC 3890 BANKING LAWS AND REGULATIONS Memorandum of Understanding Between the Securities and Futures Commission and the Hong Kong Monetary Authority on behalf of a registered institution and for making such register available for public inspection. 6.3.3 The parties will coordinate to ensure that information kept on one party's register tallies in all relevant respects with information kept on the other party's register. 7.Regulatory and Supervisory Processes 7.1 Making of Rules, Publication of Codes and Guidelines 7.1.1 The SFC is responsible for making rules and publishing codes and guidelines under the SFO, for providing guidance, amongst other things, in relation to the practices and standards with which intermediaries are expected to comply in carrying on their regulated activities. The SFC will state explicitly in such rules, codes and guidelines the extent to which they apply to registered institutions and their associated entities as well as Als that are associated entities of intermediaries. 7.1.2 The SFC will consult the HKMA before making, publishing or amending any such rules, codes or guidelines, in so far as they apply to Als by reason of their being registered institutions or associated entities of intermediaries. Draft Provisions Relating to Duties and Functions of Regulatory and Supervisory Authorities information for their own or others benefit. Oath Article 7 The Chairman and members of the Board make a oath before the Supreme Court to perform their work with the utmost care and honesty and not to act or encourage actions in contravention of the provisions of the law. The Supreme Court will treat the application for the pledge as urgent. The Chairman and members of the Board cannot take up their appointments until they have sworn their pledge. Working Principles of the Board Article 8 The Board will meet at least once a week and where necessary. The Chairman, or in their absence the Vicechairman, will chair the meeting. The agenda for each meeting is prepared and announced to the members in advance by the Chairman, or in their absence the Vicechairman. The Board meets with at least five members present, and takes decisions with at least four votes in the same direction. Board members cannot
UK Memorandum of Understanding Between HM Treasury, the Bank of England and the FSA Each will seek to provide the other with relevant information as requested. The institution receiving this information will ensure that it is used only for discharging its responsibilities and that it is not transmitted to third parties except where permitted by law. Standing Committee 10 In addition to the above arrangements, there will be a Standing Committee of representatives of the Treasury, Bank and the FSA. This will meet on a monthly basis to discuss individual cases of significance and other developments relevant to financial stability. Meetings can be called at other times by one of the participating institutions if it considers there to be an issue which needs to be addressed urgently. Each institution will have nominated representatives who can be contacted, and meet, at short notice. 11 In exceptional circumstances there may be a need for an operation which goes beyond the Banks routine activity in the money market to implement its interest rate objectives. Such a support operation is expected to happen very rarely and would normally only be undertaken in the case of a genuine threat to the 179
persons who beneficially own or control nonnatural Persons organized in the jurisdiction of the Requested Authority. (iii) In accordance with Paragraph 9(d), taking or compelling a Persons statement, or, where permissible, testimony under oath, regarding the matters set forth in the request for assistance. (c) Assistance will not be denied based on the fact that the type of conduct under investigation would not be a violation of the Laws and Regulations of the Requested Authority. 8. Requests For Assistance (a) Requests for assistance will be made in writing, in such form as may be agreed by IOSCO from time to time, and will be addressed to the Requested Authority's contact office listed in Appendix A. (b) Requests for assistance will include the following: (i) a description of the facts underlying the investigation that are the subject of the request, and the purpose for which the assistance is sought; (ii) a description of the assistance sought by the Requesting Authority and why the information sought will be of assistance;
APPENDIX F FINANCIAL CONGLOMERATES SECTION 4 IOSCO Multilateral Memoranda of Understanding Basel Committee Essential elements of a statement of mutual cooperation information purposes and exchanges of staff may promote cooperation between supervisors in country A and country B. In addition, the supervisors in the two countries should pursue areas where the training of staff at either agency would benefit from input and support by the other agency in order to reinforce sound banking supervisory practices in both countries. The supervisors of country A and country B should conduct meetings as often as appropriate to discuss issues concerning banks that maintain cross-border establishments in the respective countries.
PRC 3890 BANKING LAWS AND REGULATIONS Memorandum of Understanding Between the Securities and Futures Commission and the Hong Kong Monetary Authority 7.1.3 The HKMA will consult the SFC regarding guidelines it proposes to make or issue under the BO, in so far as such guidelines apply to registered institutions in relation to the carrying on of their regulated activities. 7.2 Exercising Supervisory Functions 7.2.1 The HKMA is the frontline supervisor of registered institutions. It is responsible for the day-to-day supervision of the carrying on of regulated activities by registered institutions. This includes:(a) performing, in a manner comparable to that adopted by the SFC in relation to licensed corporations, on-site inspections of registered institutions and, where appropriate, their associated entities and related corporations to ascertain their compliance with applicable legal and regulatory requirements; (b) conducting off-site reviews, including analysis of information submitted by registered institutions as well as other data collected on an ad hoc basis; (c) conducting background checks on any individual as appropriate before giving consent to his being an executive officer of a registered institution or otherwise entering his Draft Provisions Relating to Duties and Functions of Regulatory and Supervisory Authorities take part in discussions or voting on issues that involve them or their blood relatives up to the third degree and relatives by marriage up to the second degree. PART IV Presidency Presidency Article 9 The Presidency consists of the Board Chairman and the Deputy Chairmans of the Institution. The Chairman of the Board, being the highest officer of the Institution, is also its Chairman and is responsible for its general management and its representation. This duty includes the duty and authority to organise, supervise, evaluate and where necessary announce to the public the general framework of the Institutions activities. Duties and authorities of the Presidency Article 10 These are the duties and authorities of the Presidency: a) To ensure organisation and coordination at the highest level so that the Board, the decision making organ of the institution, and its service units work harmoniously, productively, in a
UK Memorandum of Understanding Between HM Treasury, the Bank of England and the FSA stability of the financial system to avoid a serious disturbance in the UK economy. If the Bank or the FSA identified a problem where such a support operation might be necessary, they would immediately inform and consult with each other. 12 Each institution (the lead institution) would take the lead on all problems arising in its area of responsibility as defined in paragraphs 2 and 3. The lead institution would manage the situation and coordinate the authorities response (including support operations). The form of the response would depend on the nature of the event and would be determined at the time. 13 In all cases the Bank and the FSA would need to work together very closely and they would immediately inform the Treasury, in order to give the Chancellor of the Exchequer the option of refusing support action. Thereafter they would keep it informed about the developing situation, as far as circumstances allowed. Consultation on policy changes 14 Each institution will inform the other about any major policy changes. It will consult the other in advance on any policy changes which are likely to have 180
(iii) any information known to, or in the possession of, the Requesting Authority that might assist the Requested Authority in identifying either the Persons believed to possess the information or documents sought or the places where such information may be obtained; (iv) an indication of any special precautions that should be taken in collecting the information due to investigatory considerations, including the sensitivity of the information; and (v) the Laws and Regulations that may have been violated and that relate to the subject matter of the request. (c) In urgent circumstances, requests for assistance may be effected by telephone or facsimile, provided such communication is confirmed through an original, signed document. 9. Execution of Requests for Assistance (a) Information and documents held in the files of the Requested Authority will be provided to the Requesting Authority upon request. (b) Upon request, the Requested Authority will require the production of documents identified in 7(b)(ii) from (i) any
APPENDIX F FINANCIAL CONGLOMERATES SECTION 4 IOSCO Multilateral Memoranda of Understanding Basel Committee Essential elements of a statement of mutual cooperation
PRC 3890 BANKING LAWS AND REGULATIONS Memorandum of Understanding Between the Securities and Futures Commission and the Hong Kong Monetary Authority particulars in the register referred to in clause 6.3.2; (d) handling, in accordance with the procedures set out under clause 8, complaints relating to the carrying on of any regulated activities by registered institutions; (e) where appropriate, issuing guidelines or guidance notes to elaborate on the application of the SFO and the BO, as well as the rules, codes, guidelines and other guidance made or published by the SFC, to the carrying on of regulated activities by registered institutions; and (f) where appropriate, authorizing any person under section 180 of the SFO to conduct an inspection of a registered institution, or any of its associated entities or any related corporation of either. 7.2.2 The HKMA will serve as the first point of contact for registered institutions and handle enquiries from registered institutions and their associated entities and their staff in relation to the supervision of regulated activities. 7.2.3 In interpreting the rules, codes, guidelines and other guidance made or published by the SFC, the HKMA will, where appropriate, consult the Draft Provisions Relating to Duties and Functions of Regulatory and Supervisory Authorities disciplined and organised manner; to solve duty and authority problems that arise between service units. b) To establish the agenda, day and time of Board meetings and chair meetings, c) To facilitate the fulfilling of Board decisions, to monitor the implementation of such decisions; d) To finalise proposals coming from the service units and present them to the Board; e) To prepare and submit to the Board the annual budget, income and expense accounts and the annual report; to ensure the application of the Institutions budget, the gathering of income and the making of expenditures; f) To give its opinion on strategies, policies, and related legislation in the sector in which it is active; g) To manage the Institutions relations with other bodies; h) To represent the Institution with official and private bodies; i) To ensure the publication of the final decisions of the Board in relation to the sector and the communiqus and regulations prepared by the Institution. j) To specify the area of duty and authority of persons
UK Memorandum of Understanding Between HM Treasury, the Bank of England and the FSA a bearing on the responsibilities of the other. Membership of committees 15 The FSA and the Bank will co-operate fully in their relations with international regulatory groups and committees. They will both be represented on the Basle Supervisors Committee, the EMI Banking Supervisors Sub-Committee, and on other international committees where necessary. Where only one institution is represented, it will ensure that the other can contribute information and views in advance of any meeting; and will report fully to the other after the meeting. This will promote cooperation and minimise duplication. 16 The FSA and the Bank will keep HM Treasury informed of developments in the international regulatory community which are relevant to its responsibilities. 17 The FSA and the Bank have agreed the following arrangements for chairing domestic market committees: Sterling Markets Joint Standing Committee: the FSA Foreign Exchange Joint Standing Committee: Bank Derivatives Joint 181
Person designated by the Requesting Authority, or (ii) any other Person who may possess the requested information or documents. Upon request, the Requested Authority will obtain other information relevant to the request. (c) Upon request, the Requested Authority will seek responses to questions and/or a statement (or where permissible, testimony under oath) from any Person involved, directly or indirectly, in the activities that are the subject matter of the request for assistance or who is in possession of information that may assist in the execution of the request. (d) Unless otherwise arranged by the Authorities, information and documents requested under this Memorandum of Understanding will be gathered in accordance with the procedures applicable in the jurisdiction of the Requested Authority and by persons designated by the Requested Authority. Where permissible under the Laws and Regulations of the jurisdiction of the Requested Authority, a representative of the Requesting Authority may be present at the taking of statements and testimony and may provide, to a designated INTERNATIONAL LAW INSTITUTE
PRC 3890 BANKING LAWS AND REGULATIONS Memorandum of Understanding Between the Securities and Futures Commission and the Hong Kong Monetary Authority SFC and draw reference from the experience of the SFC in applying such requirements to licensed persons. 7.2.4 In performing any of its functions in relation to any registered institution or any of its associated entities, or an AI which is an associated entity of an intermediary, the SFC may rely, in whole or in part, on the supervision of that Al or entity by the HKMA. The parties will maintain a close dialogue in relation to such supervision carried out by the HKMA. 7.2.5 Where the SFC exercises its powers of supervision under section 180 of the SFO, it will use its best endeavours to ensure that the authorized person consults the HKMA before exercising any such powers in relation to any associated entity or related corporation that is an AI, or, is to the knowledge of the authorized person (a) a controller of an Al, (b) has as its controller an AI or (c) has a controller that is also a controller of an AI. 8. Complaints 8.1 If the SFC receives a complaint concerning (a) any registered institution,(b) any executive officer of a registered institution,(c) any member of the management of a Draft Provisions Relating to Duties and Functions of Regulatory and Supervisory Authorities authorised to sign in the name of the Board Chairman; k) To decide on putting applications received by the Institution on the Boards agenda, to carry out the necessary steps on those which will not be put on the agenda. PART V Structure and Personnel of the Institution Service Units Article 12 The institutions service units consist of main service units organised as departments, supervision and consultancy units and assistance service units. The main service units will be organised by the establishment law for each Institution, depending on the characteristics of the services and duties it carries out and the field in which it operates. However, the number of main service units cannot exceed ten. The following consultancy units can be established in the Institutions structure as necessary: These are the assistance service units of the Institution:
UK Memorandum of Understanding Between HM Treasury, the Bank of England and the FSA Standing Committee: the FSA Stocklending and Repo Committee: Bank 18 The FSA and the Bank will each use best endeavours to facilitate contacts by the other with overseas central banks and/or regulators, where necessary to discharge their respective responsibilities. Provision of services 19 In some cases it will be more efficient for a service to be provided by the FSA to the Bank, or vice versa, rather than for both institutions to meet their own needs separately. In these cases, service agreements will be established between the two institutions setting out the nature of the service to be provided, together with agreed standards, details of timing, charges (if any), notice periods, and so on. These agreements will in the first instance cover: provision of facilities (premises, IT etc) during the transitional phase; the provision of analysis on domestic and overseas financial markets; the provision of research; and the processing of statistical information. Litigation 20 The Bank will retain responsibility for any liability attributable to its acts or omissions in the discharge or purported discharge of its banking 182
representative of the Requested Authority, specific questions to be asked of any witness. (e) In urgent circumstances, the response to requests for assistance may be effected by telephone or facsimile, provided such communication is confirmed through an original, signed document. 10. Permissible Uses of Information (a) The Requesting Authority may use nonpublic information and non-public documents furnished in response to a request for assistance under this Memorandum of Understanding solely for: (i) the purposes set forth in the request for assistance, including ensuring compliance with the Laws and Regulations related to the request; and (ii) a purpose within the general framework of the use stated in the request for assistance, including conducting a civil or administrative enforcement proceeding, assisting in a selfregulatory organization's surveillance or enforcement activities (insofar as it is involved in the supervision of trading or conduct that is the subject of the request), assisting in a criminal prosecution, or conducting any INTERNATIONAL LAW INSTITUTE
PRC 3890 BANKING LAWS AND REGULATIONS Memorandum of Understanding Between the Securities and Futures Commission and the Hong Kong Monetary Authority registered institution involved in the carrying on by it of a regulated activity or (d) any staff of a registered institution whose name appears in the register referred to in clause 6.3.2, the SFC will refer the complaint to the HKMA as soon as reasonably practicable. If the SFC considers that the subject of the complaint is relevant to a matter that the SFC can investigate under section 182 of the SFO, the SFC will inform the HKMA of its opinion at the time it passes a copy of the complaint to the HKMA. 8.2 The HKMA will look into every complaint relating to a registered institution that it receives, whether referred by the SFC or not. Whenever a complaint is considered by the HKMA to be relevant to a matter that the SFC can investigate under section 182 of the SFO, the HKMA will refer such complaint to the SFC as soon as reasonably practicable. 8.3 Where considered by the HKMA to be appropriate, the HKMA will refer to the SFC as soon as reasonably practicable those complaints against Als that appear to relate to the SFC's functions under the SFO, including those complaints that appear relevant to any matter about which the Draft Provisions Relating to Duties and Functions of Regulatory and Supervisory Authorities
UK Memorandum of Understanding Between HM Treasury, the Bank of England and the FSA supervisory functions prior to the transfer of these functions to the FSA and shall have the sole conduct of any proceedings relating thereto. The two institutions will cooperate fully where either faces litigation. Records 21 The FSA will be responsible for the custody of all supervisory records. It will ensure that, within the framework of the relevant legislation, the Bank has free and open access to these records.
investigation for any general charge applicable to the violation of the provision specified in the request where such general charge pertains to a violation of the Laws and Regulations administered by the Requesting Authority. This use may include enforcement proceedings which are public. (b) If a Requesting Authority intends to use information furnished under this Memorandum of Understanding for any purpose other than those stated in Paragraph 10(a), it must obtain the consent of the Requested Authority. 11. Confidentiality (a) Each Authority will keep confidential requests made under this Memorandum of Understanding, the contents of such requests, and any matters arising under this Memorandum of Understanding, including consultations between or among the Authorities, and unsolicited assistance. After consultation with the Requesting Authority, the Requested Authority may disclose the fact that the Requesting Authority has made the request if such disclosure is required to carry out the request. (b) The Requesting Authority will not disclose non-public INTERNATIONAL LAW INSTITUTE
No hierarchal rank besides a title or branch management under a unit head, other than those mentioned above, can be created in the Institution. Organisation of the Institution and personnel status Article 13 The essential and continuous duties required by the services of the Institution will be executed by career experts and assistant experts consisting of professional staff and other staff. These will be employed as contractual staff using an administrative service contract. The Institutions personnel are subject to the Civil Servants Law no. 657, apart from wages, financial and social rights. In Institutions involved in the financial markets and banking sector, in addition to the above personnel, Banking Sworn Auditor and assistants are also considered professional personnel. The service units of the Institution, the principles and procedures for personnel appointments and working and the titles, numbers and characteristics of
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PRC 3890 BANKING LAWS AND REGULATIONS Memorandum of Understanding Between the Securities and Futures Commission and the Hong Kong Monetary Authority SFC can inquire under section 179 of the SFO. 8.4 The parties will consult one another as appropriate in relation to complaints, having regard to their statutory functions under the SFO and the BO and the provisions of this MoU. 9.Investigations 9.1 If the HKMA, in the exercise of its supervisory functions over the regulated activities of registered institutions or over their associated entities or relevant individuals, considers it appropriate for the HKMA to open a case for investigation in accordance with the HKMA's internal procedures, it will:(a) notify the SFC as soon as reasonably practicable; (b) keep the SFC informed of the progress of the investigation, especially when the HKMA envisages that the SFC's assistance to conduct an investigation under section 182 of the SFO may be needed; (c) after completing and analyzing the investigation report, forward a copy to the SFC together with a covering letter to the SFC stating the HKMA's conclusions with regard to the investigation; and (d) throughout the process, keep in mind the need to report the matter to the SFC before Draft Provisions Relating to Duties and Functions of Regulatory and Supervisory Authorities contractual staff to be employed will be set out in the law regarding the establishment and working principles of the Institution. The duties and responsibilities of the service units will be organised with a regulation issued by the Council of Ministers. The principles and procedures relating to the creation, termination and use of staffs are subject to the provisions of the Decree with the Force of Law regarding the General Staff Procedures no. 190. On principle, career experts and assistant experts will be employed for work requiring expertise in the main service units of the Institution. The qualities and numbers of personnel to be employed in the main service, consultancy and assistance service units will be determined by the Council of Ministers, on the proposal of the Board. However, the ratio of personnel employed in the assistance units cannot exceed 35% of the total personnel numbers. The Institution can employ with contracted status professional personnel with sufficient expertise and specialised non-career staff, provided that these do
UK Memorandum of Understanding Between HM Treasury, the Bank of England and the FSA
documents and information received under this Memorandum of Understanding, except as contemplated by paragraph 10(a) or in response to a legally enforceable demand. In the event of a legally enforceable demand, the Requesting Authority will notify the Requested Authority prior to complying with the demand, and will assert such appropriate legal exemptions or privileges with respect to such information as may be available. The Requesting Authority will use its best efforts to protect the confidentiality of nonpublic documents and information received under this Memorandum of Understanding. (c) Prior to providing information to a selfregulatory organization in accordance with paragraph 10(a)(ii), the Requesting Authority will ensure that the selfregulatory organization is able and will comply on an ongoing basis with the confidentiality provisions set forth in paragraphs 11(a) and (b) of this Memorandum of Understanding, and that the information will be used only in accordance with paragraph 10(a) of this Memorandum of Understanding, and will not be used for competitive advantage. INTERNATIONAL LAW INSTITUTE 184
PRC 3890 BANKING LAWS AND REGULATIONS Memorandum of Understanding Between the Securities and Futures Commission and the Hong Kong Monetary Authority completing its investigation if, having regard to its and the SFC's respective functions under BO and SFO, or having regard to the details of information gathering powers that need to be exercised or whether the SFC is already investigating a related matter, it is more appropriate that the matter be passed on to the SFC. The HKMA will bring such matters to the SFC's attention as soon as reasonably practicable and the HKMA and SFC will consult as appropriate over how best to deal with them. 9.2 The SFC will consult the HKMA before exercising its power to initiate an investigation under section 182(1)(e) of the SFO where:(a) in the case of section 182(1)(e)(i), the investigation is for the purpose of considering whether to:(i) suspend or revoke, either partially or wholly, a registered institution's registration; or (ii) reprimand, fine or issue a prohibition order against a registered institution, any of its executive officers, any member of its management involved in the carrying on of any regulated activity by it 'or any of its staff whose name appears in the register referred to in Draft Provisions Relating to Duties and Functions of Regulatory and Supervisory Authorities not exceed 10% of the number of career specialists employed by the Institution. Services which require a temporary or specific specialisation will be identified by the Presidency. For such works, the provisions relating to proxy or specialisation contracts will be applied. According to the principles of the regulation to be issued by the Council of Ministers, on the proposal of the Presidency and with the approval of the Board, foreign experts can be employed.
12. Consultation Regarding Mutual Assistance and the Exchange of Information (a) The Authorities will consult periodically with each other regarding this Memorandum of Understanding about matters of common concern with a view to improving its operation and resolving any issues that may arise. In particular, the Authorities will consult in the event of: (i) a significant change in market or business conditions or in legislation where such change is relevant to the operation of this Memorandum of Understanding; (ii) a demonstrated change in the willingness or ability of an Authority to meet the provisions of this Memorandum of Understanding; and (iii) any other circumstance that makes it necessary or appropriate to consult, amend or extend this Memorandum of Understanding in order to achieve its purposes. (b) The Requesting Authority and Requested Authority will consult with one another in matters relating to specific requests made pursuant to this Memorandum of Understanding (e.g., where a request may be INTERNATIONAL LAW INSTITUTE 185
PART VI MISCELLANEOUS Salaries Retirement and social security Budget Authority and regulation Audit Accountability and Information Legal proceedings
PRC 3890 BANKING LAWS AND REGULATIONS Memorandum of Understanding Between the Securities and Futures Commission and the Hong Kong Monetary Authority clause 6.3.2; or (b) in the case of section 182(l)(e)(ii), the investigation is for the purpose of assisting the HKMA to consider whether to:(i) withdraw or suspend any consent given to a person to be an executive officer of a registered institution; or (ii) remove or suspend the particulars of a person from the register referred to in clause 6.3.2. 9.3 The SFC will share with the HKMA the findings of any investigation referred to in clause 9.2. 10. Disciplinary actions 10.1 Each party may make recommendations to the other in respect of the other's exercise of its disciplinary powers over an executive officer, or any other individual whose name appears in the register referred to in clause 6.3.2. 10.2 The SFC will consult the HKMA before exercising its power to:(a) suspend or revoke, either partially or wholly, a registered institution's registration; or (b) reprimand, fine or issue a prohibition order against a registered institution, any of its executive officers, any member of its management involved in the carrying on of a Draft Provisions Relating to Duties and Functions of Regulatory and Supervisory Authorities
denied, or if it appears that responding to a request will involve a substantial cost). These Authorities will define the terms herein in accordance with the relevant laws of the jurisdiction of the Requesting Authority unless such definition would require the Requested Authority to exceed its legal authority or otherwise be prohibited by the laws applicable in the jurisdiction of the Requested Authority. In such case, the Requesting and Requested Authorities will consult. 13. Unsolicited Assistance Each Authority will make all reasonable efforts to provide, without prior request, the other Authorities with any information that it considers is likely to be of assistance to those other Authorities in securing compliance with Laws and Regulations applicable in their jurisdiction. FINAL PROVISIONS 14. Additional Authorities Additional IOSCO members may become Authorities under this Memorandum of Understanding in accordance with the procedures set forth in Appendix B. New Authorities may be INTERNATIONAL LAW INSTITUTE 186
PRC 3890 BANKING LAWS AND REGULATIONS Memorandum of Understanding Between the Securities and Futures Commission and the Hong Kong Monetary Authority regulated activity by it or any of its staff whose name appears in the register referred to in clause 6.3.2. 10.3 The HKMA will consult the SFC before exercising its power to:(a) withdraw or suspend any consent given to a person to be an executive officer of a registered institution; or (b) remove or suspend the name of a person from the register referred to in clause 6.3.2. 10.4 Each party will ensure that it maintains a sufficient record of all communications relating to the recommendations and consultations mentioned in clauses 10.1, 10.2 and 10.3. 11. Appeals 11.1 If an appeal is lodged with the Securities and Futures Appeals Tribunal against a decision of the SFC or the HKMA concerning a registered institution, any of its executive officers, any member of its management involved in the carrying on of a regulated activity by it, or any of its staff whose name appears in the register referred to in clause 6.3.2, each party will appoint a contact person to facilitate communications between the parties during the course of the appeal. 11.2 Where any such appeal is in respect of a decision of only one Draft Provisions Relating to Duties and Functions of Regulatory and Supervisory Authorities
added under this Memorandum of Understanding by signing Appendix A. 15. Effective Date Cooperation in accordance with this Memorandum of Understanding will begin on the date of its signing by the Authorities. The Memorandum of Understanding will be effective as to additional Authorities as of the date of that Authoritys signing of Appendix A. 16. Termination (a) An Authority may terminate its participation in this Memorandum of Understanding at any time by giving at least 30 days prior written notice to each other Authority. (b) If, in accordance with the procedures set forth in Appendix B, the Chairmen of the Technical, Emerging Markets and Executive Committees (the Committee of Chairmen) determine, following notice and opportunity to be heard, that there has been a demonstrated change in the willingness or ability of an Authority to meet the provisions of this Memorandum of Understanding, as set forth in paragraph 12(a)(ii), the Committee of Chairmen may, after consultation with the Chairman of the relevant Regional Committee, INTERNATIONAL LAW INSTITUTE 187
PRC 3890 BANKING LAWS AND REGULATIONS Memorandum of Understanding Between the Securities and Futures Commission and the Hong Kong Monetary Authority party, that party will conduct the appeal and, if appropriate, instruct external lawyers for this purpose. That party will also consult the other party as it considers appropriate during the course of the appeal. 11.3 If, during the course of an appeal referred to in clause 11.2, it appears to the party conducting the appeal that the Tribunal will, under section 218(4) of the SFO, substitute for the decision under appeal a decision that the relevant party had the power to make, the former will as soon as practicable inform the other and the parties will meet to discuss the conduct of the appeal. 11.4 Where any appeal referred to in clause 11.1, arises in respect of decisions of both parties, the parties will, after receiving the relevant review notices, meet to discuss the conduct of the appeal and liaise as necessary during the course of the appeal. VI EXCHANGE OF INFORMATION 12.1 By virtue of section 378(3)(e) of the SFO and section 120(5)(fa) of the BO, each party may disclose to the other information concerning:(a) the carrying on of regulated activities by registered institutions; and (b) the receiving or Draft Provisions Relating to Duties and Functions of Regulatory and Supervisory Authorities
terminate that Authoritys participation in this Memorandum of Understanding, subject to a possible review by the Executive Committee. (c) In the event that an Authority decides to terminate its participation in this Memorandum of Understanding, cooperation and assistance in accordance with this Memorandum of Understanding will continue until the expiration of 30 days after that Authority gives written notice to the other Authorities of its intention to discontinue cooperation and assistance hereunder. If any Authority gives a termination notice, cooperation and assistance in accordance with this Memorandum of Understanding will continue with respect to all requests for assistance that were made, or information provided, before the effective date of notification (as indicated in the notice but no earlier than the date the notice is sent) until the Requesting Authority terminates the matter for which assistance was requested. (d) In the event of the termination of an Authoritys participation in the Memorandum of Understanding, whether under the provisions of 16(a) or 16(b), INTERNATIONAL LAW INSTITUTE 188
PRC 3890 BANKING LAWS AND REGULATIONS Memorandum of Understanding Between the Securities and Futures Commission and the Hong Kong Monetary Authority holding of client assets by AIs which are associated entities of intermediaries. Further, section 378(3)(e)(ii) of the SFO and section 120(5)(f) of the BO permit the SFC and the HKMA, respectively, to disclose information to each other where to do so will enable or assist the other to perform its functions and it is not contrary to the interest of the investing public/depositors or the public interest to make such disclosure. 12.2 The parties will each appoint a person or persons to be the principal point of contact between the parties for the exchange of information on a dayto-day basis depending on the regulatory function concerned, although the same person may be appointed as the point of contact in relation to more than one such function. Either party may change its principal points of contact by giving written notice to the other. 12.3 Where a party, in the course of performing its supervisory functions or otherwise, becomes aware of any matter described in Annex B as a "serious matter", it will as soon as reasonably practicable notify the other party of it. In particular, each party will, in accordance with Draft Provisions Relating to Duties and Functions of Regulatory and Supervisory Authorities
information obtained under this Memorandum of Understanding will continue to be treated confidentially in the manner prescribed under Article 11 and cooperation under this Memorandum of Understanding will continue among the other Authorities.
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PRC 3890 BANKING LAWS AND REGULATIONS Memorandum of Understanding Between the Securities and Futures Commission and the Hong Kong Monetary Authority Annex B, inform the other party upon becoming aware of any intermediary or associated entity supervised by it being in serious financial difficulties, and provide the other party with relevant information in its possession that will facilitate an assessment of the consequential impact (if any) on any intermediary or associated entity supervised by the other party. In urgent cases, initial notification will be made orally. 12.4 Each party will exchange prudential information on individual intermediaries, their associated entities and their staff (other than matters mentioned above) that will enable or assist the other party in the performance of its statutory functions. Such information will include, but is not limited to:(a) business information; (b) financial position; (c) risk profiles; (d) major corporate restructuring; (e) substantial change in business operations; (f) general supervisory concerns; and (g) exercise of supervisory powers. 12.5 The SFC will provide the HKMA, on a semi-annual basis, lists of:(a) Als that are Draft Provisions Relating to Duties and Functions of Regulatory and Supervisory Authorities
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PRC 3890 BANKING LAWS AND REGULATIONS Memorandum of Understanding Between the Securities and Futures Commission and the Hong Kong Monetary Authority shareholders of licensed corporations; (b) Als that are associated entities of intermediaries; and (c) associated entities of registered institutions. 12.6 In the course of any consultation prior to the exercise of disciplinary powers by either party, details of the matter or conduct in question will be exchanged between the parties. The parties will also share their experiences in dealing with similar cases in respect of licensed persons and registered institutions or relevant individuals. 12.7 The parties will hold regular meetings to discuss matters of mutual interest relating to the performance of their regulatory and supervisory functions. The parties will take turns to provide secretarial support for such meetings. VII CONFIDENTIALITY AND USE OF INFORMATION 13.1 Any information exchanged between the parties under this MoU will be used by the recipient only for the purposes of performing its regulatory and supervisory functions, and, except as otherwise required by law, will not be disclosed to any third party without the prior consent of the party Draft Provisions Relating to Duties and Functions of Regulatory and Supervisory Authorities
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PRC 3890 BANKING LAWS AND REGULATIONS Memorandum of Understanding Between the Securities and Futures Commission and the Hong Kong Monetary Authority providing the information. 13.2 Each party will establish and maintain such safeguards as are necessary and appropriate to protect the confidentiality of such information. VIII STAFF TRAINING AND DEVELOPMENT 14.1 Each party agrees to make arrangements for staff of the other party to attend its training programmes where relevant. 14.2 With a view to assisting each party's staff to better understand the supervisory role of the other party, secondment of staff between the parties will be considered. IX AMENDMENTS 15.1 Either party may at any time request the other party to agree to make a specific amendment, whether by supplement or otherwise, to this MoU, or may invite consultation with the other party regarding the need for any amendment or supplement to this MoU. 15.2 An amendment or supplement to this MoU takes effect only by written agreement of the parties. Draft Provisions Relating to Duties and Functions of Regulatory and Supervisory Authorities
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SECTION 5 ORGANIZATIONAL STRUCTURE OF JOINT COMMITTEE G A Walker58 and Changyuan Lin59

National Peoples Congress (NPC) Law of Financial Groups (See Annex 6)
State Council
Joint Financial Stability Committee
Administrative support
Peoples Bank of China (PBOC) 11-person Committee Presided by a State Commissioner and governor of the PBOC and minister of finance as standing members, with Chairmen of CBRC, CSRC and CIRC rotating as vice-chairpersons depending on the nature of financial institutions involved, each of them attends with the head of their respective coordination department as representatives.
Financial Stability Department
Financial Stability Division
Financial Groups Division
Financial Market/Support Division
Financial Restructuring/rehabilitation Division
Financial recovery/liquidation Division
China Banking Regulatory Commission (CBRC)
China Securities Regulatory Commission (CSRC)
China Financial Regulatory Commission (CFRC)
China Insurance Regulatory Commission (CIRC)
Ministry of Finance (MoF)
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SECTION 6 EU FINANCIAL CONGLOMERATES The most significant attempt example create a single law on financial conglomerates (as opposed to financial holding companies only) is the proposed EU draft Directive on Financial Conglomerates.1 The objective of the proposed law is to lay down rules for the supplementary supervision of all regulated entities within a financial conglomerate and impose certain controls on their activities. The proposed EU Directive includes a series of new and revised definitions including 'financial conglomerate'2 and 'mixed financial holding company' (article 2).3 Separate threshold conditions are imposed on the definition of a financial conglomerate (article 3) and an identification obligation (article 4). The Directive then contains further provision with regard to 'supplementary supervision' (Chapter II) including financial position, appointment of a co-ordinator, co-operation and exchange of information, third country reciprocity, creation of a 'financial Conglomerate Committee' (Chapter III) and a series of amendment provisions (Chapter IV). Separate provision is included with regard to 'asset management companies' (Chapter V) and certain transitional and final provisions (Chapter VI). The main requirements imposed under the proposed EU Directive include the following:
(a)
Objectives and Definitions
See draft directive 2002/87/EEC of the European Parliament and of the Council of 16 December 2002 on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate and amending Council Directives 73/239/EEC, 79/267/EEC, 92/49/EEC, 92/96/EEC, 93/6/EEC and 93/22/EEC and Directives 98/78/EC and 2000/12/EC of the European Parliament and of the Council (OJ L 035, 11/02/2003, P 0001-0027. A 'financial conglomerate' means a group that meets the following conditions (subject to article 3 of the FCD): (a) a regulated entity within the meaning of article 1 is at the head of the group or, at least, one of the subsidiaries in the group is a regulated entity within the meaning of article 1; (b) where there is a regulated entity within the meaning of article 1 at the head of the group, it is either a parent undertaking of an entity in the financial sector, an entity which holds a participation in an entity in the financial sector or an entity linked with an entity in the financial sector by a relationship within the meaning of article 12(1) of Directive 83/349/EEC; (c) where is no regulated entity within the meaning of article 1 at the head of the group, the group's activities mainly occur in the financial sector within the meaning of article 3(1); (d) at least one of the entities in the group is within the insurance sector and at least one is within the banking or investment services sector; and (e) the consolidated and/or aggregated activities of the entities in the group within the insurance sector and the consolidated and/or aggregated activities of the entities within the banking and investment services sector are both significant within the meaning of article 3(2) or (3). Any sub-group of a group that falls within this definition shall also be considered as a financial conglomerate. See FCD, article 2.14.
3 2
A parent undertaking, other than a regulated entity, that together with its subsidiaries, at least one of which is a regulated entity which has its head office in the EU and other entities, constitutes a financial conglomerate. FCD, article 1.15.
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The FCD lays down rules for the supplementary supervision of regulated entities forming part of a financial conglomerate and amends the relevant sectoral rules to the extent necessary (article 1). A number of the core definitions are adopted from the other sector directives. This includes 'credit institution', 'insurance undertaking', 'investment firm' (with the generic term 'regulated entity' applying to each of these), 'parent undertaking', 'subsidiary undertaking', 'participation', 'close links' and 'competent authorities'. New definitions are adopted with regard to 'financial conglomerate',4 'sectoral rules',5 'mixed financial holding company',6 'financial sector',7 'intra-group transactions'8 and 'risk concentration'.9 An 'asset management company' is a management company under the UCITS Directive (collective investment schemes) or an equivalent entity outside the EU.10 The definition of a 'financial conglomerate' (article 2.14) generally requires that the group includes, at least, one insurance undertaking and a banking or investment firm with the group's activities 'mainly occurring' in the financial sector or the consolidated or aggregated financial activities of the group being 'significant' (article 2(14)(c) and (e)). The relevant thresholds in determining 'mainly occur' and 'significant' are set out in article 3. This generally requires that financial activities exceed 40% of group activity or that each sector represents more than 10% of balance sheet activity or solvency requirement.11 Authorities may exclude certain groups where this is considered inappropriate or misleading.
4 5 6 7
See n. 2 above. The main Directives adopted with regard to credit institutions, insurance undertakings and investment firms. Article 2.7. See n. 2 above.
A sector composed of one of the following entities: (a) a credit institution, a financial institution or an ancillary banking services (the banking sector); (b) an insurance undertaking, a re-insurance undertaking or an insurance holding company (the insurance sector); (c) an investment firm or a financial institution (the investment services sector); or (d) a mixed financial holding company. Article 2.8.
8
All transactions by which regulated entities within a financial conglomerate rely either directly or indirectly upon other undertakings within the same group or appoint any natural or legal person linked to the undertakings within that group by 'close links' for the fulfilment of an obligation whether or not contractual and whether for payment. Article 2.18.
9
All exposures with a loss potential borne by entities within a financial conglomerate that are large enough to threaten the solvency or the financial position in general of the regulated entities in the financial conglomerate with such exposure possibly arising as a result of counterparty risk/credit risk, investment risk, insurance risk, market risk, other risks or a combination or interact of any of these. Article 2.19.
10 11
Article 2.6.
In determining whether the activities of a group 'mainly occur' in the financial sector, the ratio of the balance sheet total of the regulated and non-regulated financial sector entities in the group to the balance sheet total of the group as a whole must exceed 40%. Article 3(1). In determining whether financial sector activities are significant, the average of the ratio of the balance sheet total of each financial sector to the balance sheet total of the financial sector entities in the group and the ratio of the solvency requirements of the same financial sector to the total solvency requirements of the financial sector entities in the group must exceed 10%. Article 3(2). Cross-sectoral activities are also significant if the balance sheet total of the smallest financial sector exceeds 6 billion euro. Article 3(3).
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Competent authorities are generally required to confirm whether an authorised entity falls within a conglomerate as defined in the SCD (article 4(1)). They are generally required to cooperate closely to the extent necessary and communicate where a financial conglomerate has not already been identified. The co-ordinating authority is required to notify the group that it has been identified as a financial conglomerate and that a co-ordinator has been appointed (article 4(2)). The effect of these provisions is to create a legal obligation on the part of competent authorities to examine and identify relevant financial conglomerates and notify them accordingly. A conglomerate will generally constitute a financial group consisting of insurance and either banking or investment services. Minimum threshold conditions are also imposed subject to a 5% floor.12 Non-conglomerate groups will still be supervised on a consolidated and either financial holding company or insurance holding company basis.
(b)
Supplementary Supervision Member States are required to provide for the supplementary supervision of financial
conglomerates in addition to any underlying sectoral requirements (article 5(1)). This supplementary supervision extends to every regulated entity which is at the head of a financial conglomerate, the parent undertaking of which is a mixed financial holding company with its head office in the EU or otherwise linked with another financial sector entity. Where a financial conglomerate is a sub-group of another financial conglomerate, supplementary supervision will generally apply to the larger group. Authorities shall agree the extent to which supplementary supervision is to be applied to participations and capital ties between one or more regulated entities or significant influences otherwise exercised. Special provisions apply with regard to groups where the parent undertaking is a regulated entity or a mixed financial holding company outside the EU (article 18). Specific provisions are included with regard to the supplementary supervision of various regulatory requirements including capital adequacy (article 6), risk concentrations (article 7), intra-group transactions (article 8) and internal control mechanisms and risk management
12
Article 3(3)(a) and (b). A conglomerate may only be excluded where the relative size of its smallest financial sector does not exceed 5% of the balance sheet total or the solvency requirements of the financial sector or the market share does not exceed 5% in any Member State measured in terms of total banking or investment services and gross insurance premia.
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processes (article 9). Conglomerate capital is to be calculated on the basis of certain technical principles set out in the Annex I for the FCD and one of three calculation methods (accounting consolidation, deduction and aggregation or book value/requirement deduction).13 Additional reporting requirements may be imposed by the co-ordinator on risk concentrations and intragroup transactions on agreement with other entity authorities (Annex II). Regulated entities are also generally required to have in place at the level of the financial conglomerate adequate risk management processes and internal control mechanisms including sound administrative and accounting procedures (article 9(1)). Further specific requirements are imposed with regard to risk management processes and internal control mechanisms.14 All undertakings must have adequate internal control systems to produce any necessary data and information required with all such processes and mechanisms being subject to the supervisory board review by the appointed co-ordinator. The FCD provides for the appointment of a 'single co-ordinator' to be responsible for the co-ordination and exercise of supplementary supervision (article 10(1)). Special appointment rules are provided for.15 The co-ordinator is given certain assigned task (article 11)16 with authorities being required to co-operate and exchange relevant information with the co-ordinator (article 12).17 Authorities are also required to consult on certain matters including changes in
13 14
See Section VII.B.(1)(a) above.
Risk management processes shall include: (a) sound governance and management with the approval and periodical review of the strategies and policies by the appropriate governing bodies at the level of the financial conglomerate with respect to the all the risks assumed; (b) adequate capital adequacy policies to anticipate the impact of their business strategy on risk profile and capital requirements; and (c) adequate procedures to ensure that risk monitoring systems are well integrated into the organization and that all measures are taken to ensure that the systems implemented in all undertakings included in the scope of supplementary supervision are consistent so that the risks can be measured, monitored and controlled at the level of the financial conglomerate. Article 9(2). Internal control mechanisms must include: (a) adequate mechanisms with regard to capital adequacy to identify and measure all material risks incurred and to appropriately relate own funds to risk; and (b) sound reporting and accounting procedures to identify, measure, monitor and control intra-group transactions and risk concentrations (article 9(3)).
15
The co-ordinator will generally be: the authority that has authorised the regulated entity that is at the head of the financial conglomerate: or (b) one of the following: (i) where the parent of a regulated entity is a mixed financial holding company, the authority that authorised the regulated entity; (ii) where more than one regulated entity is involved and one has been authorised in the same Member State in which the mixed financial holding company has its head office, the authority that authorised that entity or (where there are more than one authorised entities in the same territory), the entity in the most important financial sector or with the largest balance sheet total; (iii) the regulated entity with the largest balance sheet total where no regulated entities are in the same Member State as the head office of the mixed financial holding company; or (iv) the authority that authorised the regulated entity with the largest balance sheet total in the most important financial sector either where the financial conglomerate does not have a parent undertaking or in any other case (article 10(2)).
16 These generally include: (a) co-ordination of the gathering and dissemination of relevant or essential information in on-going and emergency situations; (b) supervisory overview and assessment of the financial condition of the conglomerate; (c) assessment of compliance with the rules and capital adequacy and risk concentration and intra-group transactions; (d) assessment of the conglomerate's structure, organisation and internal control systems; (e) planning and co-ordination of supervisory activity on a going-concern and emergency situations; and (f) any other tasks, measures and decisions assigned to the co-ordinator under the or derived from the Directive. Article 11(1). 17 Competent authorities responsible for the supervision of all regulated entities within the conglomerate and the co-ordinator must cooperate closely with each other and provide one another with information essential or relevant to the exercise of the others' supervisory tasks under the sectoral rules and the FCD. Such co-operation shall provide, at least, for the gathering and exchange of information with regard to: (a) identification of the group structure of all major entities belonging to the conglomerate as well as the authorities of the regulated entities within the group; (b) the financial conglomerate's strategic policy; c) the financial situation of the financial conglomerate especially with regard to
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shareholder, organisational or management structure and major sanctions or exceptional measures (article 12(2)). Additional information may also be requested from authorities responsible for parent undertakings not otherwise included within the supplementary supervision (article 12(3)). The collection or possession of information with regard to non-regulated entities is not to imply that the authorities are required to supervise these operations on a stand-alone basis (article 12(4)). Member States must require that persons who effectively direct the business of a mixed financial holding company are of sufficiently good repute and have sufficient experience to perform those duties (article 13). Member States shall ensure that there are no legal impediments preventing natural or legal persons included within the scope of supplementary supervision from exchanging information (article 14). Competent authorities may ask the authorities in another Member State to verify any information provided (article 15). Necessary enforcement action is to be taken by the co-ordinator with regard to mixed financial holding companies or by the relevant authorities with regard to particular regulated entities where the requirements of the Directive have been breached (article 16). Member States are to provide that their authorities shall have all necessary power to take supervisory measures considered necessary to deal with breach of sectoral rules by regulated entities within a conglomerate (article 17(1)). Appropriate penalties must be available against mixed financial holding companies or their effective managers for breach of measures adopted under the Directive (article 17(2)).
(c)
Third countries Competent authorities are to verify whether the regulated entities, the parent undertakings
of which have their head office outside the EU, are subject to supervision by a third-country competent authority that is equivalent to the supplementary supervision provided for under the Directive (article 18(1)). Authorities shall consult to the extent necessary and take advice from
capital adequacy, intra-group transactions, risk concentration and profitability; (d) the financial conglomerate's major shareholders and management; (e) the organisation, risk management and internal control systems at the conglomerate level; (f) procedures for the collection of information from the entities in the conglomerate and the verification of that information; (g) adverse developments in regulated entities or in other entities within the conglomerate that could seriously affect the regulated entitles; and (h) major sanctions and exceptional measures taken by authorities under the sectoral rules or the FCD. Article 12(1).
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the Financial Conglomerates Committee where appropriate. Where equivalent supervision is not effected, authorities shall extend the scope of their supervision accordingly either in accordance with the terms of the Directive or as otherwise agreed with the co-ordinator after consultation with other relevant component authorities (articles 18(2) and (3)). The existing procedures that apply with regard to the negotiation of agreements with other third countries shall apply mutatis mutandis to the exercise of supplementary supervision of conglomerates with the existing sector committees being consulted as appropriate (article 19).
(d)
Committee procedures The Commission is required to adopt further measures under the Directive (article 20)18
assisted by a newly-established 'Financial Conglomerates Committee' (article 21(1)). The new Committee will provide general assistance to the Commission and, in particular, provide guidance as to whether the supplementary supervision in third countries will achieve equivalent objectives and keep such guidance under review. The Directive also includes a number of amendment provisions to the existing sectoral directives.
(e)
Asset management companies Pending further co-ordination of sectoral rules, Member States are required to provide for
the inclusion of asset management companies within the scope of consolidated supervision of credit institutions and investment firms and in the supplementary supervision of insurance undertakings as well as within the scope of supplementary supervision of a financial conglomerates (article 30). Member States or their competent authorities will determine which set of sectoral rules is to apply to asset management companies.
(f)
Transitional and final provisions The Commission is to submit to the Financial Conglomerates Committee a report on
Member States' practices and, if necessary, on the need for further harmonisation on the
18 This includes: (a) a more precise formulation of the definitions provided to take into account developments in financial markets or ensure uniform applications; (b) alignment of terminology and definitions with subsequent EU laws; (c) clarification of the capital calculation methods in Annex I and intra-group transactions and concentrations in Annex II, taking into account developments in financial markets and prudential techniques. Article 20(1).
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operation of the Directive.19 The Commission will also examine how to adopt the relevant international rules to eliminate double gearing of own funds within one year of such agreement being reached.20 Necessary implementing measures are to be adopted at the Member State level by 11 August 2004 with the Commission being advised accordingly. Such measures shall come into effect for the financial year beginning on 1 January 2005 (article 32).
19
This, in particular, includes: (a) inclusion of asset management companies in group-wide supervision; the choice and application of capital adequacy methods under Annex I; (b) the definition of significant intra-group transactions and significant risk concentrations and their supervision under Annex II; and (c) the intervals on which such calculations are to be made. Article 31(1). Article 31(2).
20
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SECTION 7 INSTITUTIONAL REFORM SINGLE REGULATORS
ADVANTAGES 1. POLICY (1) (2) (3) (4) (5) Policy Integration Policy Consistency Policy Simplicity Policy Review Policy Development
DISADVANTAGES 1. (1) (2) (3) (4) (5) POLICY Distinct Risk Requirements LLR and Moral Hazard Reputational Incentives Loss Specialist Service Providers Protection Specialist Interest Groups
2.
INSTITUTIONAL STRUCTURE (1) (2) (3) (4) (5) Administrative Control Contact and Communication Better Allocation and Use Resources Improved Training Enhanced Internal and External Accountability
2. (1) (2) (3) (4) (5)
INSTITUTIONAL STRUCTURE Excessive Size (Administratively Complex) Conflicts Interest Abuse Power Additional and Specialist Training Demands Loss Accountability
3.
OPERATIONAL (1) Operational Efficiency (a) (b) (c) Economies Structure Experience
3. (1)
OPERATIONAL (a) Costv (b) Complexity (c) Knowledge Slow Decision Taking and Response Times Development of Standardized Responses Increased Costs (Loss Regulatory Competition) Reduced Competition and High Levels Concentration Operational Inefficiency
(2) (3) (4) (5)
Operational Responsiveness Operational Flexibility Reduced Costs Increased Competition
(2) (3) (4) (5)
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SECTION 8 UK FINANCIAL SERVICES AND MARKETS Financial Services Authority The FSA was formally set up at its launch on 28 October 1998. The FSA represents a reconstituted Securities and Investments Board (SIB) to which responsibility for bank supervision has also been transferred under the Bank of England Act 1998 and other areas under the Financial Services and Market Act 2000. The date on which bank supervision was transferred was referred to as N1 with the date on which the Financial Services Markets Act came into effect on 1 December 2001 as N2. This transfer process will be complete with responsibility for mortgage sales, advice and general insurance on N3 (expected 2003). The FSMA provides that the body corporate known as the Financial Services Authority (the Authority under the Act) is to have the functions conferred on it by or under the Act. The FSA is accordingly not established under the FSMA as such having already been formally launched on 28 October 1998. The existence of the FSMA is simply recognised and given statutory definition (as the Authority) for the purposes of the Act. Financial Services and Markets Act The statutory framework for the supervision and regulation of financial markets including banks and banking markets in the United Kingdom is set out in the Financial Services and Markets Act. The FSMA consists for 433 sections and 22 schedules. The Act received Royal Assent on 14 June 2000 after an extended and difficult negotiation procedures. The draft Bill had originally been produced by the Treasury in July 1998 with separate Explanatory Notes and a guidance paper. The Bill was considered by a joint committee of the House of Commons and House of Lords with evidence being taken from industry and consumer representatives and other Government and official parties. A First Report was produced on 29 April 1999 and a Second Report on 29 May 1999. The Bill was introduced to the House of Commons on 17 June 1999 and having been continued into a second sessions of Parliament in October 1999, was considered for the
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final time by the House of Lords on 12 June 2000. It was given Royal Assent on 14 June 2000. With the coming into effect of the FSMA, all of the other separate sector based legislative measures in each of the main financial areas were repealed. This includes, in particular, the Banking Act 1987, the Financial Services Act 1986 and the Insurance Companies Acts as well as other major pieces of financial legislation. While responsibility for bank supervision had earlier been transferred to the FSA from the Bank under the Bank of England Act 1998 on N1, its assumption of responsibility in all other areas took effect from N2 (with certain residual functions in respect of mortgage sales, advice and general insurance to come into effect on N3. The FSMA establishes the general framework for financial regulation in the United Kingdom. For this purpose, it confers on the FSA significant rule making and enforcement powers. The main substantive obligations to be complied with by regulated institutions and their key staff (approved persons) are not set out in the FSMA but in the rules issued under the Act. These have since been consolidated in the Handbook of Rules and Guidance issues by the FSA under ss138 and 157. The FSMA generally establishes a dual authorisation and permission regime for regulated activities as defined. This is supported three main prohibitions on the conduct of unauthorised regulated business, carrying on a regulated activity without permission and on financial promotion (ss19, 20 and 21). The FSMA also sets up an extended approved persons regime governing the activities of all senior personnel within regulated institutions (ss 59-63 and 64-71). A new market abuse offence is created (s118) in addition to the existing insider trading laws and earlier statutory prohibition on misleading statements and practices (which has been restated in s397). The FSA is given enhanced enforcement powers with regard to the conduct of regulated activities (Part V) and disciplinary measures (Part XIV). It also has restated information gathering and investigation as well as insolvency and injunction and restitution related power (Parts XI, XXIV and XXV). Separate offences are also created (Part XXVII). The FSMA also contains provision for the establishment of a new integrated Ombudsman, Financial Services and Markets Tribunal and Financial Services Compensation Scheme (Parts XXVI, IX and XXV). Earlier provisions with regard to
listing are also re-set under the FSMA (Part VI) with the FSA being appointed the competent authority for listing within the United Kingdom. New procedures concerning the approval of insurance and banking transfer schemes are also provided for (Part VII). The FSMA is accordingly significant in creating the core legal or statutory framework within which financial supervision is conducted. The main regulatory obligations are then set out in the various rules issued under the Act including the general, specific and endorsing rules referred to above. The new regime accordingly combines legal formality and validity but with regulatory clarity and flexibility. The FSMA establishes the statutory framework within which the new regulatory regime operates in the UK. The detailed regulatory provisions to be imposed on banks and other financial institutions are not, however, set out in the FSMA but in the Handbook of Rules and Guidance issued by the FSA. The Handbook is issued under ss 138 and 157. The FSA is given power to make such rules applying to authorised persons as appear to it to be necessary or expedient for the purposes of protection the interests of consumers which measures are referred to as general rules for the purposes of the FSMA (s138(1)). These general rules are in addition to the endorsing rules (the City Code on Takeovers and Mergers and Rules Governing Substantial Acquisitions of Shares) and specific rules (auditors and actuaries, control of information, financial promotion, insurance business, money laundering and pricing stabilising rules). The FSA may also give guidance consisting of such information and advice as it considers appropriate with respect to the operation of the FSMA and any rules made under it, its functions, the regulatory objectives or any other desirable matter (s157(1)). The new regulatory regime is accordingly rules rather than substantive statutory provision based. The advantage of this is that the content of the FSMA can be limited to only include provisions relating to more constitutional, core obligation, powers, rights and remedy measures. The more detailed specific regulatory obligations imposed on financial firms can then be expanded in the supporting rules. The inclusion of supplementary guidance also means that they can be limited to only impose essential obligations with any supporting text or information being set out in the form of nonregulatory guidance. (Text in the Handbook is marked in the margins as either being R (for rules), G (guidance) and E (evidential only)). This further clarifies the core
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requirements to be complied with and ancillary material. These rules are nevertheless given the status of secondary legislation so that they have full legal effect. A rules based system is also more flexible and can be revised quickly and cost effectively without the need for statutory amendment. This allows the regulatory system to be easily revised in response to changes in market structure and operation. While the new regime operates on a statutory rules basis, elements of the earlier self-regulatory system established under the Financial Services Act 1986 have been retained, particularly, through the use of the Practitioner and Consumer Panels with which the FSA is required to consult in carrying out its general duties (s8). This promotes market co-operation and involvement with the earlier difficulties that arose with regard to extended regulatory delegation and enforcement of rules through member contract arrangements. The earlier advantages of close market contact are retained but no within a formal statutory regime based on legal rules and supporting guidance which also allow consistency and accountability. The main regulatory obligations imposed on financial firms are set in the FSA Handbook of rules and guidance, which is issued under ss138 and 157. The original design objectives and principles for the Handbook were announced by the FSA in April 1998. The objectives consisted of communication, consistency and implementation with five further design principles also being produced. The Handbook was to provide a succinct authoritative statement of high level principles beginning with fundamental obligations to be complied with by all regulated entities. A sold structure of rules should facilitate enforceability but supported by extensive guidance. There would be a presumption against differentiation except on policy grounds and regulatory standards would focus on firms' outputs and the adequacy of internal systems and controls. The Handbook was from an early stage to be made up of a number of separate blocks consisting of high level standards, business standards, regulatory processes, financial consumers, specialist sourcebooks and special guides. The original structure proposed has only been revised to include a formal redress section in place of the earlier financial consumer block.
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APPENDIX G BANK INSOLVENCIES DISCUSSION
G. Bank Insolvency Laws Supporting Discussion and Comparisons

(PAGES 207-226)
SECTIONS IN THIS APPENDIX 1. Insolvency Laws in the PRC 2. Principles for Effective Insolvency and Creditor Rights Systems World Bank 207 217
SECTION 1 INSOLVENCY LAWS IN THE PRC There is neither special Insolvency Law for financial institutions nor Bankruptcy Law universally applied to all kinds of enterprises in the PRC now. Regulations on insolvency in the PRC now include, a Bankruptcy Law applied to fully stated owned enterprises-Law of the People's Republic of China on Enterprise Bankruptcy, Promulgated By the Standing Committee of the National Peoples Congress in1986; Enterprises with other nature may only carry out the process of liquidation and bankruptcy in accordance with relevant stipulations of Civil Procedure Law of China; A series of interpretations were issued by the Supreme Peoples Court to direct trials of enterprise bankruptcy, and among them Provisions on Some Issues concerning the Trial of Enterprise Bankruptcy Cases issued in 2002 covers the widest aspects. Relevant regulations on financial institutions insolvency are dispersed in deferent laws rules and regulations, and most of them are somewhat general. Those laws and rules include the Commercial Law, Insurance Law, Securities Law, Company Law, Trust & Investment Law, Regulation on Administration of Foreign-funded Financial Institutions, Measures of Administration on Financial Leasing Companies, Measures of Administration on Enterprise Group Finance Companies and Rules Of Administration on Rural Credit Cooperatives.
CURRENT LAWS AND RULES CONCERNING BANKRUPTCY IN CHINA The following main Laws may be distinguished: (1) BANKRUPTCY LAW FOR STATE OWNED ENTERPRISES
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The bankruptcy of SOEs is governed under the following provisions: (a) Requirements of Bankruptcy Article 3. Enterprises which, owing to poor operations and management that result in serious losses, are unable to repay debts that are due shall be declared bankrupt in accordance with the provisions of this Law.
According to Provisions on Some Issues concerning the Trial of Enterprise Bankruptcy Cases of the Supreme Peoples Court, make explanation of unable to repay the debts that are due as (1) the period for the implementation of the debts has expired;(2) the creditor has made a claim; (3) the debtor obviously lacks the capacity to repay the debts. Where the debtor ceases repaying the debts that are due and this situation keeps going on, it may be presumed that the debtor is unable to repay the debts that are due if there is no adverse evidence. (b) Submission and Acceptance of Bankruptcy Applications According to the current Bankruptcy Law, the bankruptcy will not start without application to court by the debtor himself or by the creditors, even if the debtor cannot repay his debts that have been due. According to the Supreme Courts deliverance on carrying out the Bankruptcy Law of Enterprises, Article 15, The court will mot declare the bankruptcy of the debtor without application of bankruptcy. Article 7, Where the debtor is unable to repay debts that are due, the creditors may file to declare the debtor bankrupt. Article 8, The debtor, upon the agreement of its superior departments in charge, may apply for the declaration of bankruptcy. (c) Claims Report Article 9. Creditors who have been notified shall, within one month after receiving the notice, and creditors who have not been notified shall, within three months after the date of the public announcement, report their claims to the people's court and explain the amount of the claims, as well as whether or not they are secured with property, and also
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deliver relevant materials of proof. Creditors who do not report their claims during these periods shall be deemed to have automatically abandoned their claims. (d) Creditors Meetings Article 13. All creditors are members of the creditors' meeting. Article 14. The first creditors' meeting is called by the people's court and shall be convened within 15 days after the expiration of the period for reporting claims. Subsequent creditors' meetings are convened at such times as the people's court or the chairman of the meeting deems the necessary, and may also be convened on the request of the liquidation committee or of creditors whose claims comprise more than one fourth of the total amount of claims not secured with property. Article 16. Resolutions of the creditors meeting are adopted by majority of creditors with the right to vote present at the meeting; the amount of their claims must comprise more than half of the total amount of claims that are not secured with property, however, with respect to resolution adopting a draft settlement agreement, such amount must comprise more than two thirds of the total amount of claims not secure with property. Resolutions of the creditors' meeting shall have binding force on all the creditors. (e) Compromise and Reorganization Article 17. With respect to enterprises for which the creditors apply for bankruptcy, the superior departments in charge of the enterprise that is the subject of the bankruptcy application may, within three months after the people's court has accepted the case, apply to carry out reorganization of the enterprise; the period of reorganization shall not exceed two years. (f) Bankruptcy Declaration Article 23. In any of the following circumstances, after the judgment of the people's court, an enterprise shall be declared bankrupt: (1) if, in accordance with the provisions of Article 3 of this Law should be declared bankrupt;
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(2) if, reorganization has been terminated in accordance with the provisions of Article 21 of this Law; and (3) if, upon the expiration of the period of reorganization, is unable to repay debts in accordance with the settlement agreement. (g) Liquidation Article 28. Bankruptcy property comprises the following property: (1) all property that the bankrupt enterprise operated and managed at the time bankruptcy was declared; (2) property obtained by the bankrupt enterprise during the period from the declaration of bankruptcy until the conclusion of the bankruptcy proceedings; (3) other property rights that the bankrupt enterprise should exercise. Article 37. After the prior deduction of bankruptcy expenses from the bankruptcy property, repayment shall be made in the following order: (1) wages of staff and workers and labour insurance expenses that are owed by the bankrupt enterprise; (2) taxes that are owed by the bankrupt enterprise; and (3) bankruptcy claims. (h) Conclusion of Bankruptcy According to the Enterprises Bankruptcy Law, in any of the following circumstances the court should make a judge of terminating bankruptcy proceedings: (1) After reorganization, the enterprise may repay its debt in accordance with the settlement agreement; (2) Bankruptcy property is insufficient to cover bankruptcy expenses; (3) Distribution of the bankruptcy property has been completed. (2) METHODS OF ADMINISTRATION ON FINANCIAL LEASING COMPANY REQUIREMENTS OF BANKRUPTCY/BANKRUPTCY PROCEEDINGS Article 45: Article 43: When finding that assets of the financial leasing company are insufficient to repay its debts, Liquidation team shall immediately stop liquidation, report
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it to the Peoples Bank of China, and apply to the court for bankruptcy of the finance leasing company, upon the approval of the Peoples Bank of China. (3) METHODS OF ADMINISTRATION ON TRUST & INVESTMENT COMPANIES - REQUIREMENTS OF BANKRUPTCY/ BANKRUPTCY PROCEEDINGS Article 18: Where unable to repay debts that are due, the trust & investment company may, upon the agreement of the Peoples Bank of China, apply to the court for bankruptcy. (4) METHODS OF ADMINISTRATION ON SECURITIES COMPANIES REQUIREMENTS OF BANKRUPTCY/ BANKRUPTCY PROCEEDINGS Article 19: Where the creditor of the securities company apply to the court for the bankruptcy of the company, the securities company must report to the CSRC within one workday after knowing this application (5) METHODS OF ADMINISTRATION ON ENTERPRISE GROUP FINANCE COMPANY - REQUIREMENTS OF BANKRUPTCY/ BANKRUPTCY PROCEEDINGS Article 43: Liquidation team shall, when finding that assets of the company are insufficient to repay its debts, immediately stop liquidation, report it to the Peoples Bank of China, and apply to the court for bankruptcy of the finance company upon the approval of the Peoples Bank of China. (6) INSURANCE LAW The following provisions may be distinguished: (a) Requirements of Insolvency/Insolvency Procedures Article 87 If an insurance company becomes insolvent, it shall be declared bankrupt by the People's Courts and with the approval of the insurance supervision and administration department. If an insurance company is declared bankrupt, the liquidation group shall be organized by the people's courts, insurance supervision and administration department and related personnel to carry out liquidation according to law. (b) Business Arrangement after Insolvency Article 88 If an insurance company with life insurance operations is cancelled or declared bankrupt according to law, the life insurance contracts and reserve funds it holds
shall be transferred to another insurance company undertaking life insurance. If the company fails to reach transfer agreement with another life insurance company, the insurance supervision and administration department shall designate a life insurance company to accept the business. Where any life insurance contract or reserve fund as provided for in the preceding paragraph is transferred or accepted upon the designation of the insurance supervision and administration department, the legitimate rights and interests of the insured and beneficiaries shall be retained. (c) Repayment Order Article 89 In the case when an insurance company is declared bankrupt, the property shall be liquidated according to the following order after giving priority to paying for the bankrupt expenses: (1) (2) (3) (4) To pay the wages of the workers and labor insurance expenses; To pay indemnities or insurance money; To pay taxes in arrears; and To pay debt owed by the company.
If the property is not enough for payment for items in the same order, it shall be paid out proportionately. (7) COMPANY LAW OF CHINA - REQUIREMENTS OF INSOLVENCY Article 189 When a company is declared bankruptcy according to law due to insolvent of debt payment, the people's court shall organize a liquidation group composed of shareholders, relevant departments and specialized personnel according to the provisions of relevant laws and conduct liquidation of the company. Article 196 If after clearance of the assets and compilation of the balance sheet and list of assets of a company to be liquidated due to dissolution or liquidation, the assets of the company are found to be insufficient for the debt payments, the liquidation group shall immediately apply for declaration of bankruptcy of the company with the people's court. If the company has been declared bankruptcy by the people's court, the liquidation group shall hand over the liquidation affairs to the people's court.
(8) COMMERCIAL BANK LAW REQUIREMENTS OF INSOLVENCY, INSOLVENCY PROCEDURES AND REPAYMENT ORDER Article 71 If the commercial bank cannot pay the due debts, it will be declared bankrupt by the people's court in accordance with law and with the agreement of the People's Bank of China. When a commercial bank is declared bankrupt, the people's court will organize the People's Bank of China and other relevant departments to set up a group for settling accounts with the bank. While the bankrupt commercial bank is undergoing the process of account settlement it should first pay the principal and interest of the individual depositors after paying the fees for account settling, employees' wages which are in arrears and labor insurance. Article 72 Commercial banks should terminate their operations upon a disbandment, dismantlement and bankruptcy. (9) DETAILED RULES FOR THE IMPLEMENTATION OF THE REGULATIONS ON THE ADMINISTRATION OF FOREIGN-FUNDED FINANCIAL INSTITUTIONS - REQUIREMENTS OF INSOLVENCY AND INSOLVENCY PROCEDURES Article 108 Where a foreign-funded institution with legal person status is liquidated because of disbanding, and if the liquidation group finds that the property of the foreign-funded institution with legal person status is not enough to pay the debts after clearing the property and drawing on the balance sheet and property list, it shall apply to the peoples court for bankruptcy upon the approval of the Peoples Bank of China. After the foreign-funded institution with legal person status is declared bankrupt as ruled by the peoples court, the liquidation group shall transfer the liquidation matters to the peoples court. (10) CIVIL LAW OF PROCEDURES OF CHINA The following provisions may be distinguished: (a) Conditions for Bankruptcy Article 199. If an enterprise as legal person is in serious losses and unable to repay the debts that are due, the creditors may apply to a people's court for declaring the debtor's bankruptcy repayment, the debtor may also file at a people's court to declare bankruptcy repayment.
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(b) Bankruptcy Declaration & Claim Report Article 200. After rendering an order to declare bankruptcy repayment, the people's court shall notify the debtors and the known creditors within ten days and make a public announcement. Creditors who have been notified shall, within one month after receiving the notice, and creditors who have not been notified shall, within three months after the date of the announcement, report their claims to the people's court Creditors who do not report their claims during these periods shall be deemed to have abandoned their claims. (c) Creditors Meeting Creditors may hold creditors meeting to discuss and reach an agreement of settlement & distribution or institute a compromise. (d) Liquidation Team Article 201. The people's court may set up a liquidation team composed of relevant state organs and personnel. The liquidation teem shall be responsible for the keeping, putting into order, appraisal, disposition and distribution of the bankruptcy property. The liquidation team may carry out necessary civil actions in accordance with the law. The liquidation team shall be responsible to, and report on its work to, the people's court. (e) Repayment Order Article 204. After the prior deduction of bankruptcy expenses from the M PROVISIONS ON SOME ISSUES CONCERNING THE TRIAL OF ENTERPRISE BANKRUPTCY CASES OF THE SUPREME PEOPLES COURT The following additional provisions may be distinguished under the Provisions on some issues concerning the trial of enterprise bankruptcy cases of the Supreme Peoples Court: (a) Bankruptcy Applicant Creditors who have the qualification as a legal person. Creditors. (b) Establishment of Liquidation Team & Supervision Team
214 FINAL REPORT - 15 DECEMBER 2003
Article 18 After the peoples court has accepted an enterprise bankruptcy case, it may, in addition to immediately making the bankruptcy declaration and forming the liquidation team, form a team for supervising the enterprise under the circumstance that the original management office of the enterprise is unable to implement its management duties normally. The members in the team for supervising the enterprise shall be selected from the higher-level department in charge the enterprise, the representatives of the shareholders meeting, the original managers of the enterprise and the main creditors. Such intermediation institutions as accounting firms and law firms may also be retained to participate in the team. The team for supervising the enterprise shall be mainly responsible for dealing with the following matters: (1) (2) (3) sorting and counting as well as preserving the enterprise properties; checking enterprise; (4) (5) paying necessary expenses permitted by the peoples court; other work permitted by the peoples court. the claims of the enterprise; carrying out necessary operational activities for the benefits of the
The team for supervising the enterprise shall be responsible to the peoples court, and shall accept the guidance and supervision of the peoples court. (c) Bankruptcy Conciliation Article 25 After the peoples court has accepted an enterprise bankruptcy case, and before the bankruptcy proceedings are terminated, the debtor may apply to the peoples court for conciliation. The peoples court may, in the process of trying a bankruptcy case, propose suggestions on conciliation to both the creditors and the debtor on the basis of their specific situation. Where, before the peoples court makes an order on bankruptcy declaration, the creditors meeting and the debtor reach a conciliation agreement that has been ratified by the order of the peoples court, the peoples court shall publicize an announcement and suspend the bankruptcy proceedings. Where, after the peoples court makes an order on bankruptcy declaration, the creditors meeting and the debtor reach a conciliation agreement that has been ratified by
the order of the peoples court, the peoples court shall make an order on suspending the execution of the bankruptcy declaration order, and shall announce the suspension of the bankruptcy proceedings.
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SECTION 2 PRINCIPLES AND GUIDELINES FOR EFFECTIVE INSOLVENCY AND CREDITOR RIGHTS SYSTEMS WORLD BANK
Principle 1
Compatible Enforcement Systems
A modern credit-based economy requires predictable, transparent and affordable enforcement of both unsecured and secured credit claims by efficient mechanisms outside of insolvency, as well as a sound insolvency system. These systems must be designed to work in harmony. Principle 2 Enforcement of Unsecured Rights
A regularized system of credit should be supported by mechanisms that provide efficient, transparent, reliable and predictable methods for recovering debt, including seizure and sale of immovable and movable assets and sale or collection of intangible assets such as debts owed to the debtor by third parties. Principle 3 Security Interest Legislation
The legal framework should provide for the creation, recognition, and enforcement of security interests in movable and immovable (real) property, arising by agreement or operation of law. The law should provide for the following features: Security interests in all types of assets, movable and immovable, tangible and intangible, including inventory, receivables, and proceeds; future or afteracquired property, and on a global basis; and based on both possessory and non-possessory interests; Security interests related to any or all of a debtor's obligations to a creditor, present or future, and between all types of persons; Methods of notice that will sufficiently publicize the existence of security interests to creditors, purchasers, and the public generally at the lowest possible cost; Clear rules of priority governing competing claims or interests in the same assets, eliminating or reducing priorities over security interests as much as possible. Recording and Registration of Secured Rights
Principle 4
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There should be an efficient and cost-effective means of publicizing secured interests in movable and immovable assets, with registration being the principal and strongly preferred method. Access to the registry should be inexpensive and open to all for both recording and search. Principle 5 Enforcement of Secured Rights
Enforcement systems should provide efficient, inexpensive, transparent and predictable methods for enforcing a security interest in property. Enforcement procedures should provide for prompt realization of the rights obtained in secured assets, ensuring the maximum possible recovery of asset values based on market values. Both nonjudicial and judicial enforcement methods should be considered. Principle 6 Key Objectives and Policies
Though country approaches vary, effective insolvency systems should aim to: Integrate with a country's broader legal and commercial systems. Maximize the value of a firm's assets by providing an option to reorganize. Strike a careful balance between liquidation and reorganization. Provide for equitable treatment of similarly situated creditors, including similarly situated foreign and domestic creditors. Provide for timely, efficient and impartial resolution of insolvencies. Prevent the premature dismemberment of a debtor's assets by individual creditors seeking quick judgments. Provide a transparent procedure that contains incentives for gathering and dispensing information. Recognize existing creditor rights and respect the priority of claims with a predictable and established process. Establish a framework for cross-border insolvencies, with recognition of foreign proceedings. Director and Officer Liability
Principle 7
Director and officer liability for decisions detrimental to creditors made when an enterprise is insolvent should promote responsible corporate behavior while fostering reasonable risk taking. At a minimum, standards should address conduct based on knowledge of or reckless disregard for the adverse consequences to creditors.
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Principle 8
Liquidation and Rehabilitation
An insolvency law should provide both for efficient liquidation of nonviable businesses and those where liquidation is likely to produce a greater return to creditors, and for rehabilitation of viable businesses. Where circumstances justify it, the system should allow for easy conversion of proceedings from one procedure to another. Principle 9 Commencement: Applicability and Accessibility
A. The insolvency process should apply to all enterprises or corporate entities except financial institutions and insurance corporations, which should be dealt with through a separate law or through special provisions in the insolvency law. State-owned corporations should be subject to the same insolvency law as private corporations. B. Debtors should have easy access to the insolvency system upon showing proof of basic criteria (insolvency or financial difficulty). A declaration to that effect may be provided by the debtor through its board of directors or management. Creditor access should be conditioned on showing proof of insolvency by presumption where there is clear evidence that the debtor failed to pay a matured debt (perhaps of a minimum amount). C. The preferred test for insolvency should be the debtor's inability to pay debts as they come dueknown as the liquidity test. A balance sheet test may be used as an alternative secondary test, but should not replace the liquidity test. The filing of an application to commence a proceeding should automatically prohibit the debtor's transfer, sale or disposition of assets or parts of the business without court approval, except to the extent necessary to operate the business. Principle 10 Commencement: Moratoriums and Suspension of Proceedings A. The commencement of bankruptcy should prohibit the unauthorized disposition of the debtor's assets and suspend actions by creditors to enforce their rights or remedies against the debtor or the debtor's assets. The injunctive relief (stay) should be as wide and all embracing as possible, extending to an interest in property used, occupied or in the possession of the debtor. B. To maximize the value of asset recoveries, a stay on enforcement actions by secured creditors should be imposed for a limited period in a liquidation proceeding to enable
higher recovery of assets by sale of the entire business or its productive units, and in a rehabilitation proceeding where the collateral is needed for the rehabilitation. Principle 11 Governance: Management A. In liquidation proceedings, management should be replaced by a qualified courtappointed official (administrator) with broad authority to administer the estate in the interest of creditors. Control of the estate should be surrendered immediately to the administrator except where management has been authorized to retain control over the company, in which case the law should impose the same duties on management as on the administrator. In creditor-initiated filings, where circumstances warrant, an interim administrator with reduced duties should be appointed to monitor the business to ensure that creditor interests are protected. B. There are two preferred approaches in a rehabilitation proceeding: exclusive control of the proceeding by an independent administrator or supervision of management by an impartial and independent administrator or supervisor. Under the second option complete power should be shifted to the administrator if management proves incompetent or negligent or has engaged in fraud or other misbehavior. Similarly, independent administrators or supervisors should be held to the same standard of accountability to creditors and the court and should be subject to removal for incompetence, negligence, fraud or other wrongful conduct. Principle 12 Governance: Creditors and the Creditors' Committee Creditor interests should be safeguarded by establishing a creditors committee that enables creditors to actively participate in the insolvency process and that allows the committee to monitor the process to ensure fairness and integrity. The committee should be consulted on non-routine matters in the case and have the ability to be heard on key decisions in the proceedings (such as matters involving dispositions of assets outside the normal course of business). The committee should serve as a conduit for processing and distributing relevant information to other creditors and for organizing creditors to decide on critical issues. The law should provide for such things as a general creditors assembly for major decisions, to appoint the creditors committee and to determine the committee's
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membership, quorum and voting rules, powers and the conduct of meetings. In rehabilitation proceedings, the creditors should be entitled to select an independent administrator or supervisor of their choice, provided the person meets the qualifications for serving in this capacity in the specific case. Principle 13 Administration: Collection, Preservation, Disposition of Property The law should provide for the collection, preservation and disposition of all property belonging to the debtor, including property obtained after the commencement of the case. Immediate steps should be taken or allowed to preserve and protect the debtor's assets and business. The law should provide a flexible and transparent system for disposing of assets efficiently and at maximum values. Where necessary, the law should allow for sales free and clear of security interests, charges or other encumbrances, subject to preserving the priority of interests in the proceeds from the assets disposed. Principle 14 Administration: Treatment of Contractual Obligations The law should allow for interference with contractual obligations that are not fully performed to the extent necessary to achieve the objectives of the insolvency process, whether to enforce, cancel or assign contracts, except where there is a compelling commercial, public or social interest in upholding the contractual rights of the counterparty to the contract (as with swap agreements). Principle 15 Administration: Fraudulent or Preferential Transactions The law should provide for the avoidance or cancellation of pre-bankruptcy fraudulent and preferential transactions completed when the enterprise was insolvent or that resulted in its insolvency. The suspect period prior to bankruptcy, during which payments are presumed to be preferential and may be set aside, should normally be short to avoid disrupting normal commercial and credit relations. The suspect period may be longer in the case of gifts or where the person receiving the transfer is closely related to the debtor or its owners. Principle 16 Claims Resolution: Treatment of Stakeholder Rights and Priorities
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A. The rights and priorities of creditors established prior to insolvency under commercial laws should be upheld in an insolvency case to preserve the legitimate expectations of creditors and encourage greater predictability in commercial relationships. Deviations from this general rule should occur only where necessary to promote other compelling policies, such as the policy supporting rehabilitation or to maximize the estate's value. Rules of priority should support incentives for creditors to manage credit efficiently. B. The bankruptcy law should recognize the priority of secured creditors in their collateral. Where the rights of secured creditors are impaired to promote a legitimate bankruptcy policy, the interests of these creditors in their collateral should be protected to avoid a loss or deterioration in the economic value of their interest at the commencement of the case. Distributions to secured creditors from the proceeds of their collateral should be made as promptly as possible after realization of proceeds from the sale. In cases where the stay applies to secured creditors, it should be of limited specified duration, strike a proper balance between creditor protection and insolvency objectives, and provide for the possibility of orders being made on the application of affected creditors or other persons for relief from the stay. C. Following distributions to secured creditors and payment of claims related to costs and expenses of administration, proceeds available for distribution should be distributed pari passu to remaining creditors unless there are compelling reasons to justify giving preferential status to a particular debt. Public interests generally should not be given precedence over private rights. The number of priority classes should be kept to a minimum. Principle 17 Design Features of Rehabilitation Statutes To be commercially and economically effective, the law should establish rehabilitation procedures that permit quick and easy access to the process, provide sufficient protection for all those involved in the process, provide a structure that permits the negotiation of a commercial plan, enable a majority of creditors in favor of a plan or other course of action to bind all other creditors by the democratic exercise of voting rights (subject to appropriate minority protections and the protection of class rights) and provide for
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judicial or other supervision to ensure that the process is not subject to manipulation or abuse. Principle 18 Administration: Stabilizing and Sustaining Business Operations The law should provide for a commercially sound form of priority funding for the ongoing and urgent business needs of a debtor during the rescue process, subject to appropriate safeguards. Principle 19 Information: Access and Disclosure The law should require the provision of relevant information on the debtor. It should also provide for independent comment on and analysis of that information. Directors of a debtor corporation should be required to attend meetings of creditors. Provision should be made for the possible examination of directors and other persons with knowledge of the debtor's affairs, who may be compelled to give information to the court and administrator. Principle 20 Plan: Formulation, Consideration and Voting The law should not prescribe the nature of a plan except in terms of fundamental requirements and to prevent commercial abuse. The law may provide for classes of creditors for voting purposes. Voting rights should be determined by amount of debt. An appropriate majority of creditors should be required to approve a plan. Special provision should be made to limit the voting rights of insiders. The effect of a majority vote should be to bind all creditors. Principle 21 Plan: Approval of Plan The law should establish clear criteria for plan approval based on fairness to similar creditors, recognition of relative priorities and majority acceptance. The law should also provide for approval over the rejection of minority creditors if the plan complies with rules of fairness and offers the opposing creditors or classes an amount equal to or greater than would be received under a liquidation proceeding. Some provision for possible adjournment of a plan decision meeting should be made, but under strict time limits. If a plan is not approved, the debtor should automatically be liquidated. Principle 22 Plan: Implementation and Amendment
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The law should provide a means for monitoring effective implementation of the plan, requiring the debtor to make periodic reports to the court on the status of implementation and progress during the plan period. A plan should be capable of amendment (by vote of the creditors) if it is in the interests of the creditors. The law should provide for the possible termination of a plan and for the debtor to be liquidated. Principle 23 Discharge and Binding Effects To ensure that the rehabilitated enterprise has the best chance of succeeding, the law should provide for a discharge or alteration of debts and claims that have been discharged or otherwise altered under the plan. Where approval of the plan has been procured by fraud, the plan should be subject to challenge, reconsidered or set aside. Principle 24 International Considerations Insolvency proceedings may have international aspects, and insolvency laws should provide for rules of jurisdiction, recognition of foreign judgments, cooperation and assistance among courts in different countries, and choice of law. Principle 25 Enabling Legislative Framework Corporate workouts and restructurings should be supported by an enabling environment that encourages participants to engage in consensual arrangements designed to restore an enterprise to financial viability. An enabling environment includes laws and procedures that require disclosure of or ensure access to timely, reliable and accurate financial information on the distressed enterprise; encourage lending to, investment in or recapitalization of viable financially distressed enterprises; support a broad range of restructuring activities, such as debt writeoffs, reschedulings, restructurings and debtequity conversions; and provide favorable or neutral tax treatment for restructurings. Principle 26 Informal Workout Procedures A country's financial sector (possibly with the informal endorsement and assistance of the central bank or finance ministry) should promote the development of a code of conduct on an informal out-of-court process for dealing with cases of corporate financial difficulty in which banks and other financial institutions have a significant exposure especially in markets where enterprise insolvency has reached systemic levels. An
informal process is far more likely to be sustained where there are adequate creditor remedy and insolvency laws. The informal process may produce a formal rescue, which should be able to quickly process a packaged plan produced by the informal process. The formal process may work better if it enables creditors and debtors to use informal techniques. Principle 27 Role of Courts Bankruptcy cases should be overseen and disposed of by an independent court or competent authority and assigned, where practical, to judges with specialized bankruptcy expertise. Significant benefits can be gained by creating specialized bankruptcy courts. The law should provide for a court or other tribunal to have a general, non-intrusive, supervisory role in the rehabilitation process. The court/tribunal or regulatory authority should be obliged to accept the decision reached by the creditors that a plan be approved or that the debtor be liquidated. Principle 28 Performance Standards of the Court, Qualification & Training of Judges Standards should be adopted to measure the competence, performance and services of a bankruptcy court. These standards should serve as a basis for evaluating and improving courts. They should be enforced by adequate qualification criteria as well as training and continuing education for judges. Principle 29 Court Organization The court should be organized so that all interested partiesincluding the administrator, the debtor and all creditorsare dealt with fairly, objectively and transparently. To the extent possible, publicly available court operating rules, case practice and case management regulations should govern the court and other participants in the process. The court's internal operations should allocate responsibility and authority to maximize resource use. To the degree feasible the court should institutionalize, streamline and standardize court practices and procedures. Principle 30 Transparency and Accountability
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An insolvency system should be based on transparency and accountability. Rules should ensure ready access to court records, court hearings, debtor and financial data and other public information. Principle 31 Judicial Decision making and Enforcement Judicial decision making should encourage consensual resolution among parties where possible and otherwise undertake timely adjudication of issues with a view to reinforcing predictability in the system through consistent application of the law. The court must have clear authority and effective methods of enforcing its judgments. Principle 32 Integrity of the Court Court operations and decisions should be based on firm rules and regulations to avoid corruption and undue influence. The court must be free of conflicts of interest, bias and lapses in judicial ethics, objectivity and impartiality. Principle 33 Integrity of Participants Persons involved in a bankruptcy proceeding must be subject to rules and court orders designed to prevent fraud, other illegal activity or abuse of the bankruptcy system. In addition, the bankruptcy court must be vested with appropriate powers to deal with illegal activity or abusive conduct that does not constitute criminal activity. Principle 34 Role of Regulatory or Supervisory Bodies The body or bodies responsible for regulating or supervising insolvency administrators should be independent of individual administrators and should set standards that reflect the requirements of the legislation and public expectations of fairness, impartiality, transparency and accountability. Principle 35 Competence and Integrity of Insolvency Administrators Insolvency administrators should be competent to exercise the powers given to them and should act with integrity, impartiality and independence.
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APPENDIX H BANK INSOLVENCIES INTERNATIONAL COMPARISONS
H. Bank Insolvency Laws An International Comparison

(PAGES 227-233)
International Comparison Country/ Procedure

To what extent is the banking supervisor responsible for the insolvency procedure?
PRC
Japan
South Korea
Canada
Switzerland
UK
USA
The Peoples Court is in charge of the entire insolvency procedure with the approval and involvement of the Peoples Bank of China (PBC).
To what extent is the procedure managed by a bankruptcy court?
The banking supervisor (the Financial Services Authority) is in charge of administrative intervention and reorganization procedure. The court is in charge of judicial insolvency procedures where the involvement of the bank supervisors is limited. Prime Minister and Deposit Insurance Corporation are also involved.
The banking supervisory agency (the Financial Supervisory Commission) is in charge of the early intervention and reorganization procedure. The court is in charge of the liquidation procedure. The Minister of Finance and Economy and the Korea Deposit Insurance Corporation are also involved.
Banking supervisor is in charge of the early intervention procedure. The Minister of Finance may approve the liquidation. The court is in charge of the winding-up (liquidation) procedure.
The court is in charge of the entire insolvency procedure.1
The court is in charge of the entire insolvency procedure although the Financial Services Authority (FSA) may intervene as a arty as appropriate.
The banking supervisory agencies and especially the Federal Deposit Insurance Corporation (FDIC) are in charge of the insolvency procedure. FDIC assumes the lead responsibility. The Federal Reserve Board and Office of Comptrollers Currency are also involved.
What mechanisms are there for interagency and court coordination?
The PBCs approval and notification are required in bankruptcy procedure.
The FSA acts under the direction of the Prime Minister. The FSA applies to the court for judicial
When the FSC takes pre-liquidation intervening measures, it should consult with the Minister of Finance and
No formal coordination mechanism between banking supervisor and the court.
No formal mechanism for coordination between the bank supervisor and the court except that the courts decision must
The FSA has the power to make an application for an administration or winding up order. In the course of the
The generally OCC appoints the FDIC as receiver or conservator.
A proposal for an amendment to Switzerlands Banking Act was submitted to the Swiss Parliament in 2002 which considerably supervisory competencies in insolvency by transferring all
powers to administer bank reorganization or liquidation proceedings from the courts to the banking supervisor, the Swiss Federal Banking Commission. The proposal for the new legal framework along with an explanatory report published for submission to Parliament in November 2002 can be downloaded in German, French and Italian at http://www.bk.admin.ch/ch/d/ff/2002/8117.pdf
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International Comparison Country/ Procedure PRC Japan

insolvency procedure. Notification procedure between FSA and courts.
South Korea
Economy. The FSC may file a petition for liquidation and may present opinions to the court in the liquidation proceedings.
Canada
The bank superintendent may request the Attorney General of Canada to apply to the court for a winding-up order.
Switzerland
be notified to the banking supervisor (the Swiss Federal Banking Commission).
UK
procedure both the FSA and the court may give directions to the courtappointed administrator.
USA
To what extent is bank insolvency governed by a special law or the general bankruptcy or insolvency law?
There is neither a special insolvency law for financial institutions nor bankruptcy law universally applied to all kinds of enterprises at present.2
Specialized bank proceedings coexist with general-law on liquidations of banks: (1) Banking Act; (2) Deposit Insurance Act; (3) Law Concerning Special Cases of Reorganization Proceedings for Financial Institutions.3
Special laws for banks: (1) Depositor Protection Act; (2) Enforcement Degree of the Depositor Protection Act; (3) The Act Concerning Structural Improvement of a Financial Industry.
Special laws for banks: (1) Winding-up and Restructuring Act 1985;4 (2) Bank Act 1991.5
General laws apply: (1) Federal Law on Banks and Savings Banks of 1934; (2) Debt Enforcement and Bankruptcy Act of 11th April, 1889/ 16th December 1994.
General laws apply:6 (1) Insolvency Act 1986 and Insolvency Act 2000; (2) Banks Administration Proceedings Order 1989; (3) Enterprise Act 2002.
Special law for banks: Federal Deposit Insurance Act.
Relevant regulations on financial institutions insolvency are spread across a number of different laws, rules and regulations with many being general in scope and nature. These include the Commercial Law, Insurance Law, Securities Law, Company Law, Trust & Investment Law, Regulation on Administration of Foreign-funded Financial Institutions, Measures of Administration on Financial Leasing Companies, Measures of Administration on Enterprise Group Finance Companies and Rules of Administration on Rural Credit Cooperatives.
This law provides for some special treatment for bank insolvencies in place of judicial procedures. It should nevertheless be noted that there has been no case where the banking supervisors have made an application for judicial insolvency. All cases have been handled under administrative procedure, at least, until now.
4 5 6
In Canada, the federal bankruptcy legislation does not apply to banks. The liquidation of insolvent banks is regulated in the Winding-up and Restructuring Act of 1985. The Bank Act of 1991provides the Superintendent with significant powers to take control of a bank with a view to restructuring the bank.
When the Insolvency Act 1986 was enacted in the UK, the special administration procedure included was only available to non-banks companies. This was changed with the adoption of the Banks Administration Proceedings Order 1989 which declared the administration order procedure applicable to banks. All other general insolvency procedures have always been available against banks and other financial institutions.
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Explain the extent to which any preinsolvency supervisory intervention is available.
PRC
Japan
South Korea
Canada
Supervisory intervention process.9
Switzerland
UK
No separate intervention apart from general supervisory powers (including request for information or documents, investigations and issuing administrative sanctions or directions [including higher capital ratios or liquidity requirements]).
USA
None under the current system
Prompt corrective action 7
Timely corrective measures.8
None under the current system.10
Prompt correction action.11
Explain the extent to

7 8
None under the relevant regulations
(a) Administration;13
(a) Merger;
No formal reconstruction
(a) Composition with creditors; or
(a) Administration; 17
(a) Purchase and
Under the Banking Act, FSA may order the improvement of a banks business and require it to take adequate measures as specified in the government ordinance depending on its capital ratio.
When the FSC deems that the financial soundness of a financial institution falls below the specified standards, the FSC may request or order the financial institution to improve its financial soundness, such as issuing warnings or reprimands, requiring the increase or reduction of capital, prohibiting the acquisition of assets of high risk, suspending officers, appointing an administrator or suspending business. Where it intends to appoint an administrator after deciding to suspend the whole business of any insured financial institution, the FSC shall appoint officers or employees of the Korean Deposit Insurance Corporation as administrators of the institution.
9
Under the Canadian Bank Act 1991, where a bank has failed or will not be able to pay its liabilities, the banking superintendent may take control, for a period not exceeding sixteen days, of the bank or its assets. The supervisor shall manage the business and affairs of the bank and the powers and duties of the directors of the bank are suspended. Control by the supervisor expires on the day on which a resuming business notice is sent to the directors of the bank. The supervisor may also request the Attorney General of Canada to apply for a winding-up order under the Winding-up and Restructuring Act. This process allows the banking supervisor to intervene, to take corrective action and, where such action fails to restore a bank to financial soundness, to close the bank in a timely manner.
The current proposal for an amendment to the Banking Act, however, introduces the procedure for an investigator to be appointed for investigation or monitoring purposes and, under certain conditions according to the mandate defined by the Swiss Federal Banking Commission, can act in lieu of the banks managers or directors.
11 US law establishes a special corrective action regime should the bank become undercapitalized or significantly undercapitalized or critically undercapitalized. If an institution becomes undercapitalized, it must submit an acceptable capital restoration plan, comply with limits on its asset growth and obtain prior regulatory approval for acquisitions, branching and new lines of business, and - if not viable may face the appointment of a conservator or receiver. A significantly undercapitalized institution faces a long list of additional safeguards which are either prescriptive or discretionary. A critically under-capitalized institution faces stringent activity restrictions aimed at minimizing the potential for loss to the insurance fund, a prohibition against making payments on its subordinated debt and the appointment of a conservator or receiver.
10
229
12 Under the Bankruptcy Law for State Owned Enterprises, the supervisory department in charge of the enterprise that is the subject of the bankruptcy application may, within three months after the Peoples Court has accepted the case, apply to carry out a reorganization of the enterprise, the period of which shall not exceed two years. Under the Provision on Some Issues Concerning the Trial of Enterprise Bankruptcy Cases of the Supreme Peoples Court, the Peoples Court may in the process of considering a bankruptcy case, propose suggestions on conciliation to both the creditors and the debtor on the basis of their specific situation. Apart from this, there is no further specific or detailed regulation. 13 This system was introduced by the Deposit Insurance Act where financial administrators take control of the management of failed financial institutions. Under this system, the FSA may, under the direction of the Prime Minister appoint a financial administrator to manage the business and assets of a failed financial institution. The management by the financial administrators is to be completed within one year (with a possible one year extension). The administrator may transfer the assets of the bank or may apply for judicial insolvency procedure.
Under this scheme, a bridge bank is established to deal with cases in which no assuming financial institution can be immediately found. A bridge bank may be established as a subsidiary of the DIC, allowing the DIC to guarantee debts and lend the funds necessary for the operation of the bridge bank to be conducted smoothly and compensate for a portion of the losses arising from its operation. The DIC will also be allowed to provide financial assistance to the bridge bank. The operation of the bridge banks is to be completed within two years (with a possible one year extension). The FSC may recommend, request or order that a financial institution whose financial status is not sound, merge or transfer its business or contracts in order to induce a sound management of the financial institution and to prevent in advance any insolvency of the financial institution. The FSC may designate a specific financial institution and recommend that it merge with, succeed to the business of or take over contracts from an insolvent financial institution. The Korea Deposit Insurance Corporation may render additional support funds to the institution with which the bank merges or succeeds to its business. A composition or scheme of arrangement is generally considered to be in the best interest of creditors as it avoids involuntary liquidation and the debtors assets can be realised more favourably. If a bank is no longer in a position to meet its commitments in a timely manner, it can apply to the court for the grant of a moratorium with a view to creating a composition or scheme of arrangement. Any creditor entitled to apply for the opening of bankruptcy proceedings can also apply to the court to open composition proceedings. There are three types of composition agreement: an ordinary composition agreement, a composition agreement with an assignment of assets; and a composition agreement in bankruptcy proceedings. On court approval of the deed of composition or arrangement, it becomes binding on all creditors. If there are any prospects of recovery, the composition court grants the debtor a moratorium of four to six months and appoints a trustee. The moratorium can be extended to up to 24 months. During this time, no debt collection proceedings can be instituted or continued. If the court grants the moratorium, it appoints one or more qualified persons as commissioners of the bank which is placed under the supervision of the court and can be removed by it on cause shown. During the moratorium, the bank continues to do business under the supervision and in accordance with the instructions of the commissioner. 17 The administration procedure under the 1986 Act has been substantially reformed under the Enterprise Act 2002 with the main objective focusing on the rescue of a company. A court may make an administration order only if it is satisfied that the company is or is likely to become unable to pay its debts. An administrator can be appointed either by an administration order made by the court or out of court by the company or its directors. The administrator will be an officer of the court and must manage the affairs, business and property of the company and perform his functions with the objective of rescuing the company wherever possible. Once a company enters administration procedures there is a moratorium on the enforcement of security over the companys assets. An administrators appointment, in the absence of a court or creditor approved extension, automatically ceases to have effect after 12 months. Any extension must be requested by the administrator before the appointment ceases to take effect.
18 A workout is generally a consensual arrangement between a company and its major creditors who cooperate within an express contractual framework. The approach to workouts in the UK has been sponsored by the Bank of England and is known as the London Approach. The essence of this approach is that a companys bankers and where appropriate its major creditors jointly ensure that it has sufficient liquidity to continue trading. 19 16 15
14
This is an agreement between a company, its shareholders and creditors. This is a statutory procedure with little court involvement whereby a reorganisation plan proposed by the directors involves delayed or reduced debt payments or a capital restructuring. If the directors have put forward the proposal, they must select an authorised insolvency practitioner to act as a nominee to supervise its implementation. If the proposal is approved by more than 75% of creditors by value, the nominee becomes a supervisor and implements the voluntary arrangement in accordance with the terms of the proposal.
20 This is a scheme under which a company may make a compromise or arrangement with its creditors (or shareholders) or any class of them. The company can select the creditors to which its scheme will apply. Schemes bind the dissentients of the relevant class if approved under the statutory procedures provided for. This scheme of arrangement may be used where an administration order is in force, where there is a liquidator or provisional liquidator in office or where there are no insolvency proceedings in relation to the company. In order to be binding, the scheme must first be approved by a majority in number representing 75% in value of the members or creditors or class of members or creditors. 21 In purchase and assumption transactions, a solvent depository institution purchases the assets and assumes liabilities of the failed institution. In some respects, the purchase and assumption transaction resembles a merger of the failed institution into a solvent one with the solvent institution paying a reduced amount for the going concern value of the failed institution as well as for any regulatory advantages that the transaction may offer. The FDIC makes up the remaining shortfall by cash assistance to the acquiring institution.
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which any reconstruction or reorganization measures exist.
PRC
on financial institutions insolvency.12
Japan
(b) Bridge bank scheme14 (c) Merger and transfer of business; (d) Financial assistance.
South Korea
(b) Transfer of business or contract.15
Canada
measure under Canadian system.
Switzerland
(b) Moratorium.
16
UK
(b) Workouts;18 (c) Company voluntary arrangement under Part I of the Insolvency Act;19 (d) Scheme of arrangement under the Companies Act 1985.20
USA
assumption transactions;21 (b) Bridge banks22 (c) New banks;23 (d) Open bank assistance.24
Explain the extent to which any financial assistance is available especially through capital injections into unsound financial institutions.
No capital injection.
The Deposit Insurance Act has enlarged the scope for the DIC where financial assistance is allowed including capital injection.25
The FSC may request the Government to invest in or purchase securities from ailing financial institutions. The Government and
No external capital injection (although the institution may be required to increase its capital under threat of
Financial assistance may be provided through capital injections.26
22 Under this structure, a newly chartered national bank is established to acquire some or all of the assets and liabilities of the failed bank and then manages and operates the bridge bank pending a final resolution such as an assisted sale of the bridge bank. This structure has been used in the USA in connection with a number of large failed banks. The establishment of a bridge bank requires a determination that the creation of the bridge bank will prove to be more efficient than a liquidation and that the continued operation of the failed bank is necessary to provide adequate banking services in the relevant banking community or is in the best interests of the banks depositors and the public.
Under this arrangement, the failed bank is closed and a new bank established by the receiver or conservator in the same community as the failed bank. The new bank assumes the deposits of the failed bank and temporarily provides banking services to the community. The new bank is managed by an individual selected by the receiver or conservator and maintains insured deposits. The income from operations are retained by the receiver or conservator and the losses are made up by the deposit insurance fund. The assets of the failed bank, other than those necessary to provide banking services related to the deposits, which are largely non-performing, are retained and liquidated by the receiver or conservator. Open bank assistance involves the provision of financial assistance by the government or by the deposit insurer or guarantor to a troubled bank to enable the bank to continue to manage its affairs so as to return to a safe and sound condition and profitability. Assistance can take a variety of forms, including loans, deposits, asset or securities purchases, assumption of liabilities and capital injection. No open bank assistance may be provided, unless the FDICs Board of directors determines that the procedure represents the least costly approach to the problem.
25 This allows DIC to provide financial assistance to the assuming institutions not only when all the business is transferred, but even when only a portion of the business is transferred. It also allows supplementary financial assistance following the transfer of business and/or merger and allows financial assistance to failed financial institutions for the purpose of ensuring equity among creditors. In addition, the law introduces measures to enhance the capital of the assuming institutions and to share a portion of the losses incurred after the transfer of business (loss sharing) as means to extend financial assistance. Companies, other than banks and bank holding companies, are also eligible for financial assistance by means of share acquisitions. 24
23
231
International Comparison Country/ Procedure PRC Japan South Korea

the KDIC may also render the fund supports to the merged financial institutions to promote the merger.
Canada
Switzerland
UK
administrative action).
USA
What are the formal stages of the liquidation process?
The commercial banks shall apply to the court for bankruptcy, upon the approval of the People Bank of China. 27
FSA may apply for judicial insolvency procedure, such as bankruptcy, corporate reorganization or civil rehabilitation. 28
Upon a petition by the creditor, debtor or the FSC, the court shall appoint a liquidator or receiver in bankruptcy procedure upon the recommendation of the FSC, normally a financial expert or KDIC. 29
Simple liquidation and court-supervised liquidation under the Banking Act.30 Winding-up process under Winding-up and Restructuring Act
If the composition agreement is rejected or the moratorium revoked, a bankruptcy proceeding may be opened immediately.
32
Voluntary liquidation;33 Compulsory liquidation.34
Appointment of receiver or conservator (liquidator) 35 and deposit payoff ./36
31
26 The FDIC may consider providing direct financial assistance to depository institutions under the following circumstances: grounds for the appointment of a fiduciary exist or likely will exist in the future unless capital levels are increased; it is unlikely that the institution can meet its current capital adequacy standards without assistance; the institutions management has been competent and has complied with applicable laws and regulations; and the institutions management has not engaged in insider dealings, speculative practices or other abusive activities. 27 Where it finds that its assets are insufficient to repay its debts, a commercial bank must report this to the Peoples Bank of China and apply to the Peoples Court for bankruptcy on the approval of the PBC. Where a commercial bank is declared bankrupt, the Peoples Court will organize the Peoples Bank of China and other relevant departments to set up a liquidation group for settling accounts with the bank. 28 Japanese banks may be subject to judicial insolvency procedure, such as bankruptcy, corporate reorganization and civil rehabilitation, which are common to other business entities. Usually, only the debtors and creditors may apply. When an application is made by anyone other than the FSA, the court has to notify the application to FSA. The Deposit Insurance Corporation will also assume an important role in the insolvency procedures. In order to avoid a heavy burden to give notice to a large number of depositors, notices may be made to the DIC instead of to each depositor. The DIC will then make up a depositors list and submit this to the court with submission of the list having the same effect as the filing of claims by each depositor. 29 The FSC may recommend a financial expert or an officer or an employee of the Korea Deposit Insurance Corporation as liquidator. The court must serve the agency intervening in the bankruptcy with a written instrument specifying the matters at the time of adjudication. In determining the deadline for filing proof of claims and fixing the date for examination of claims, the court is required to hear the agencys opinion in advance. The agency intervening in the bankruptcy may present or state its opinion to the court in the course of bankruptcy proceedings for any financial institution. 30 A bank with no property and liabilities may apply to the Minister of Finance for letters patent dissolving the bank. The Minister may, by order, approve the application. The Superintendent or any interested person may, at any time during the liquidation of a bank, apply to a court for an order for the continuance of the voluntary liquidation under the supervision of the court.
232
International Comparison Country/ Procedure PRC Japan South Korea Canada Switzerland UK USA
PLEASE NOTE: This table is based on the most up to date information available at the time of writing; although, no warranty or guarantee can be given with regard to its validity or accuracy.
31 A court may make a winding-up order when a bank is insolvent. An application for the winding-up order may be made by a bank or by a shareholder of a bank or the Attorney General of Canada in a case where the Superintendent takes control of the bank or its assets. The court may appoint a liquidator which will generally be the Canadian Deposit Insurance Corporation. The Superintendent shall not be appointed as a liquidator of the bank. On his appointment, the liquidator shall take into his custody or under his control all of the property and effects of the institution and shall perform its duties with reference to winding-up the business. The court may also appoint, at any time where this is considered advisable, one or more inspectors whose duty is to assist and advise the liquidator in the liquidation of the bank. Any person dissatisfied with an order or decision of the court may make an appeal.
The bankruptcy proceedings can be initiated at the debtors own request, at the creditors request or by the board of directors and if all of the above fail to do so, by the auditor. A petition must be made to the court for an order opening bankruptcy proceedings and appointing a liquidator to wind-up the company. The proceedings can take from several months to several years depending on the size of the company, the volume of its assets or the size of the businesses that has to be wound up as well as possible court litigation. The court appointed liquidator (either an official bankruptcy officer or an appointed private administrator) takes control of the company and the powers of directors cease. Appeals against the liquidations orders can be lodged in court.
33 There are two different procedures for the voluntary liquidation of a company: a members voluntary liquidation which is under the effective control of the shareholders of the company and a creditor voluntary liquidation which is under the control of the creditors. A voluntary liquidation may be undertaken without reference to the court but the courts assistance can be requested if required. 34 Where a bank has become insolvent or is about to become insolvent, the FSA generally has two options: it can either present a petition for an administration order or a petition for the winding up of the bank where there is no realistic prospect of avoiding insolvent liquidation. The compulsory liquidation by the court is deemed to commence at the time of the presentation of the petition rather than at the date of the order. Once the winding-up order has been made, no action can be started or continued against the bank without the leave of the court. The directors powers cease and the business ceases except to the extent necessary for the institution to be wound up. Liquidators must be licensed insolvency practitioners who are duly qualified to act as a liquidator. 35 The traditional method for closing an institution is to cease business and appoint a receiver to realise its assets and distribute them to creditors. Alternatively, the banking agencies may choose to appoint a conservator to operate the institution with a view toward maintaining its going-concern value in the disposition of its assets. There are differences in powers and legal functions between receivers and conservators although the roles are closely related. In practice, the FDIC is almost always appointed as receiver or conservator for all institutions. If a sale can be arranged quickly, a receivership will be established. If a sale is not possible, then a conservatorship may be the preferred option. 36 When a banking institution fails, the banking agencies may close the bank and appoint the FDIC as receiver or conservator (liquidator) and as insurer to pay off all the insured depositors immediately in cash or by transferring the deposits to another insured institution. The FDIC in its corporate capacity is then subrogated to the former depositors and has a claim against the receivership along with other creditors. The FDIC as receiver will in the interim realise the assets of the bank and distributes them rateably to all creditors according to their order of priority. Instead of a straight deposit payoff, the FDIC generally prefers to use an insured deposit transfer where the insured deposits are transferred to another institution which is willing to compensate the FDIC for the value of the deposit base (above).
32
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APPENDIX I CENTRAL BANK LAWS 10 MARKETS
I. Summary of ten reference markets treatment of central bank law

(PAGES 233-290)
Table of Ten Sections

I. II. III. IV. V. VI. VII. IX X. Objectives Functions Monetary Operations Independence Organization Lender of last resort Accountability and Transparency Supervisory Responsibilities Finance and accounting 234 236 244 248 265 272 275 282 284 286
VIII. Relations with other institutions
Table of Ten Countries Covered

A. Peoples Republic of China B. Canada C. European Union D. Federal Republic of Germany E. Japan F. Republic of Korea G. Poland H. Taipei, China I. United Kingdom J. United States
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I.
A. (PRC) PBC Law of 1995
Objectives
Article 3 The aim of monetary policies is to maintain the stability of the value of the currency and thereby promote economic growth. B. (Canada) Bank of Canada Act1
Preamble To regulate credit and currency in the best interests of the economic life of the nation, to control and protect the external value of the national monetary unit and to mitigate by its influence fluctuations in the general level of production, trade, prices and employment, and to promote the economic and financial welfare of Canada. C. (ESCB) The European System of Central Banks2
The objectives of the ESCB are clearly defined in Article 105.1 of the EC Treaty: (1) The primary objective of the ESCB shall be to maintain price stability. (2) Without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Community. D. (Germany) Act concerning the Deutsche Bundesbank 3
Article 3 The Bank shall participate in the performance of the ESCB tasks with the primary objective of maintaining price stability; contribute to the stability of payment and clearing systems. E. (Japan) Bank of Japan Law4
1 2
Unless otherwise noted, the relevant contents are cited from the Bank of Canada Act, updated to 1999. The ESCB is governed by the EC Treaty (which was amended in 1992 by the Maastricht Treaty on European Union)
and by the Protocol on the Statute of the European System of Central Banks and of the European Central Bank which is annexed to the Treaty (ESCB Statute).
3
Unless otherwise noted, the relevant contents are cited from Act concerning the Deutsche Bundesbank of 1992,
amended in 2002.
4
Unless otherwise noted, the relevant contents are cited from the Bank of Japan Law of 1997, amended in 1998, 2000,
and 2001.
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Article 2 Currency and monetary control shall be aimed at, through the pursuit of price stability, contributing to the sound development of the national economy. F. Bank of Korea Act 5
Article 1 The purpose of this Act is to contribute to the sound development of national economy by establishing the Bank and seeking price stabilization through the establishment and execution of effective monetary and credit policy. G. (Poland) Act on the National Bank of Poland 6
Article 3 The basic objective of National Bank of Poland (NBP) shall be to maintain price stability, and it shall at the same time act in support of Government economic policies, insofar as this does not constrain pursuit of the basic objective of the NBP. H. (Taipei, China) Central Bank of China7
from Article 2 The primary objectives (in rank order) are promoting financial stability; guiding sound banking operations, maintaining stability in the value of the currency and fostering economic development. I. (UK) Bank of England Act8
Section 11 In relation to monetary policy, the objectives of the Bank of England (Bank) shall be (a) to maintain price stability; and (b) subject to that, to support the economic policy of the Government, including its objectives for growth and employment. J. (USA) Federal Reserve Act9
Section 225a The Board of Governors of the Federal reserve System and the Federal Open market Committee shall maintain long run growth of the monetary and credit aggregates
5 6 7 8 9
Unless otherwise noted, the relevant contents are cited from the Bank of Korea Act of 1950, amended in 1998. Unless otherwise noted, the relevant contents are cited from the Act on the National Bank of Poland of 1997. Unless otherwise noted, the relevant contents are cited from the Central Bank of China Act of 1935, amended in 1979 Unless otherwise noted, the relevant contents are cited from the Bank of England Act of 1998. Unless otherwise noted, the relevant contents are cited from 12 USC, Chapter 3, Federal Reserve System.
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commensurate with the economys long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.
II.
Functions
Article 4 PBC shall perform the following functions: (1) formulate and implement monetary policies in accordance with the law; (2) issue Renminbi (RMB) and control its circulation; (3) examine, approve, supervise and administer financial institutions in accordance with regulations; (4) supervise and control the financial market in accordance with regulations; (5) promulgate ordinances and rules concerning financial administration and business; (6) hold, administer and manage the State foreign exchange reserve and bullion reserve; (7) manage the State treasury; (8) maintain the normal operation of the systems for making payments and settling accounts; (9) be responsible for statistics, investigation, analysis and forecasting for the banking industry; (10) engage in relevant international banking operations in its capacity as the central bank of the State; and (11) other functions assigned to it by the State Council. In order to implement monetary policies, PBC may carry out financial operations in accordance with the relevant provisions of Chapter 4 of this law. B. (Canada) Bank of Canada Act
Article 18 The Bank may (1) buy and sell gold, silver, and any other coin and gold and silver bullion; (2) buy and sell foreign currencies and maintain deposit accounts with baks or foreing banks either in or outside Canada, to facilitate such operations; (3) buy and sell securities issued or guaranteed by Canada or any province; (4) buy and sell short-term securities issued by the UK with less than six months maturity; (5) buy and sell treasury bills or other obligations of the USA; (6) buy and sell special drawing rights issued by the IMF; (7) buy and sell bills of exchange and promissory noted by a bank;
(8) make loans or advances for periods not exceeding six months to banks; (9) make loans or advances for periods not exceeding six months to the Government of Canada or the government of any province on the pledge or hypothecation of readily marketable securities issued or guaranteed by Canada or any province; (10) or the purpose of its open market operations, buy and sell in the open market securities, bills of exchange and promissory notes; (11) accept deposits from the Government of Canada and pay interest on those deposits; (12) open accounts in a central bank in any other country or in the BIS, accept deposits from central banks in other countries, and other international financial institutions; (13) acquire, hold, lease or dispose of real property; (14) accept deposits by an Act of Parliament to be transferred to the Bank; Article 24 The Bank shall act as fiscal agent of the Government of Canada. Article 25 The Bank has the sole right to issue notes intended for circulation in Canada and those notes shall be a first charge on the assets of the Bank C. (ESCB) The European System of Central Banks
The basic tasks of the ESCB are defined in Article 105.2 of the EC Treaty: - to define and implement the monetary policy of the Community; - to conduct foreign exchange operations consistent with the provisions of Article 111; - to hold and manage the official foreign reserves of the Member States; - to promote the smooth operation of payment systems. Also Article 106 of the EC Treaty needs to be taken into account: - The ECB shall have the exclusive right to authorize the issue of banknotes Together with the basic task, the ESCB has other (non-basic) tasks: the ESCB shall contribute to the smooth conduct of policies pursued by the competent authorities relating to the prudential supervision of credit institutions and the stability of the financial system (article 105.5. of the EC Treaty). Consultative role in draft legislation of EU and Member States in the field of its competence (Article 105.4 of the EC Treaty) Collection of statistical information (Article 5 of ESCB Statute) Advisory functions (Article 4 of the ESCB Statute) External operations (Article 23 of the ESCB Statute) and others (Article 24 of the ESCB Statute)
D.
(Germany) Act concerning the Deutsche Bundesbank

238 FINAL REPORT - 15 DECEMBER 2003
Article 3 The Bankshall hold and manage foreign reserves of the Federal Republic of Germany, shall arrange for the execution of domestic and cross-border payments and shall contribute to the stability of payment and clearing systems. Article 14 Without prejudice to article 106(1) of the Treaty establishing the European Community, the Bank shall have the sole right to issue banknotes in the area in which this Act is law. Article 18 In order to fulfil its tasks, the Bank shall be entitled to order and collect statistics from credit institutions. Articles 19 The Bank shall be entitled to conduct the following transactions with credit institutions and other market participants ! grant loans backed by collateral and to trade in the open market by buying and selling claims, marketable securities and precious metals outright or under repurchase agreements, ! accept giro account deposits and other deposits; ! accept assets, in particular securities, for safe custody and management; the Bank is debarred from exercising any voting rights in respect of the securities in its safe custody or under its management; ! accept cheques, direct debit instructions, bills of exchange, payment order, securities and interest coupons for collection and , if sufficient cover has been provided, to make payment; ! execute other banking transactions on behalf of third parties if sufficient cove has been provided; ! buy and sell payment media denominated in currencies other than euro; ! carry out all banking transactions with non-residents. Article 20 The Bank shall be entitled to conduct the transactions specified in Article 19, item 2 to 7, with the Federal Republic of Germany, the Federal special funds, the federal states and other public authorities; for this purpose, the Bank may grant intra-day credit; Article 22 The Bank shall be entitled to conduct the transactions specified in Article 19, item 2 to 7, with natural and legal persons at home and abroad. Article 23 The Bank may certify cheques drawn on it only if sufficient cover has been provided.
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Article 25 The Bank should conduct transactions other than those authorized by articles 19, 20, 22, and 23 only for the purpose of carrying out and completing authorized transaction, or for its own operations or for its staff. E. (Japan) Bank of Japan Law
Article 1 The objective of the Bank, is to issue banknotes and to carry out currency and monetary control; ensure smooth settlement of funds among banks and other financial institutions, thereby contributing to the maintenance of an orderly financial system. Article 33 In order to achieve the objectives of Article 1, the Bank may conduct the following business: ! discounting of commercial bills and other bills or notes; ! making loans against collateral; ! buy and selling of commercial bills and other bills or notes, government bonds and obligations; ! lending and borrowing of government bonds and obligations, and other bonds or debentures against cash collateral; ! receiving money for deposits; ! dealing in domestic exchange; ! taking custody of negotiable securities, other securities and certificates which represent property rights; ! performing other business incidental to the business above. Article 34 The Bank may, in addition to the business above, conduct the following business with the government: ! making loans, without collateral, subject to a limit imposed by a Diet resolution; ! making loans, without collateral, to finance the governments temporary borrowing permitted under the Fiscal Law other laws; ! subscribing or underwriting government bonds subject to a limit imposed by a Diet resolution; ! subscribing or underwriting financial bills and other bills issued for stopgap financing; ! accepting custody of precious metals and other items. Article 35 The Bank shall handle Treasury funds.
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Article 36 The Bank shall handle affairs of the government relating to currency and finance. Article 37 The Bank shall, irrespective of the provisions of article 33, may provide uncollateralized loans to financial institutions and other financial business entities prescribed by a Cabinet Order for a period within that prescribed by a Cabinet Order when they unexpectedly experience a temporary shortage of funds for payment due to accidental causes, whereby the business operations of the financial institutions may be seriously hampered if the shortage is not recovered swiftly, provided that the advance is necessary to the smooth settlement of funds among financial institutions. Article 38(2) At the request of the Prime Minister and the Minster of Finance, the Bank may conduct the business necessary to maintain an orderly financial system. Article 39 The Bank may upon authorization from the Prime Minister and the Minister Finance, conduct business deemed to contribute to the smooth settlement of funds among financial institutions. Article 40 The Bank, when necessary, may buy and sell foreign exchange on its own account or as an agent of the government. Article 41 The Bank may conduct the business with foreign central banks and international institutions. F. Bank of Korea Act
Article 28 The Monetary Board shall deliberate and decide on the following matters with respect to monetary and credit policy: ! basic matters on the issue of notes; ! minimum reserve requirement rates to be maintained by financial institutions; ! standards and interest rates on rediscount or other credit business to financial institutions; ! basic matters on emergency credit to financial institutions; ! designation of financial institutions which can be denied credit by the Bank; ! basic matter on the sale and purchase of national bonds or government guaranteed bonds in the open markets; ! basic matters on the issue, selling, repurchase or redemption, etc, of the Banks currency stabilization bonds;
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! ! ! ! ! ! ! !
! !
basic matters on the establishment and operation of currency stabilization bond accounts; basic matters of credit extended to profit-making enterprises other than financial institutions in time of extreme deflation; request for submission of materials to financial institutions; request for inspection and joint inspection of financial institutions to the Monetary Supervisory Service; highest rate of interests on various kinds of deposits or other payment by financial institutions; highest rate of interests on credit business such as various kinds of loans or other charges by financial institutions; restrictions on the longest time limit of loans extended by financial institutions and kinds of securities; restrictions on the ceiling or sector ceiling on loans and investments by financial institutions within a fixed period in urgent need of national economy such as hyperinflation; prior approval on loan by financial institutions in urgent need of national economy such as hyperinflation; and other matters provided for under this Act and other Acts.
Article 81 The Bank shall carry out the operation and management business of payment and settlement system directly related to monetary and credit policy. Article 82 The Bank shall carry out the business falling under any of the following authorized by the Minister of Finance and Economy: ! foreign exchange business and foreign currency holdings; ! receiving deposits from foreign financial institutions, international financial organizations, foreign governments and their agencies or the UN agencies; and ! selling and buying precious metals. G. (Poland) Act on the National Bank of Poland
Article 3 The responsibilities of NBP shall also include: ! organising monetary settlement; ! managing the official exchange reserves; ! conducting foreign exchange operations within the bounds stipulated by statute; ! providing banking services to central government; ! regulating the liquidity of the banks and providing them with refinancing facilities; ! establishing the necessary conditions for the development of the banking system;
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drawing up an account of the national balance of payments for reporting purpose, together with balances of the foreign assets and liabilities of central government; performing other responsibilities as specified by statute.
Article 4 The NBP shall have exclusive right to issue the currency of the Polish Republic. Article 12(2) In consideration of monetary policy guidelines, the Monetary Policy Council shall, in particular: ! set NBP base interest rates; ! determine the procedures governing the reserve requirement and set the reserve ratio; ! set ceilings on the liabilities arising from loans and advances drawn by the NBP from foreign banking and financial institutions; ! approve the NBP budget and the report on the activity of the NBP; ! accept the annual accounts of the NBP; ! determine the principles applicable to open market operations. Article 44 The NBP may accept bills from the banks for discounting and rediscounting. Article 49 The NBP may be entrusted with the administration of central government borrowings conducted through the issue of securities. Article 52 The NBP shall perform its function of central foreign exchange authority by holding and managing the official foreign exchange reserves, and also by conducting banking operations and taking other measures to ensure the safety of foreign exchange operations and international payments liquidity. H. (Taipei, China) Central Bank of China
from Articles 6 & 9 The Board of Directors powers and functions include the examination of 1) money, credit & foreign exchange policies, 2) changes in the Banks capital and its budget reports, and 3) the opening and closing of the Banks branches. In addition the Board must approve the Banks operations and planning, its major by-laws and regulations, and the appointments and removal of the Banks department heads (up to 8), deputy heads and branch managers. The Board may allocate any and all these functions to the Executive Board.
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The Board of Supervisors roles are to examine the Banks balance sheet and accounts, the amount of currency in issue and the reserves therefor; and to approve the Banks fiscal reports and investigate regulatory violations. I. (UK) Bank of England Act
Section 13 The Monetary Policy Committee shall have responsibility within the Bank for formulating monetary policy. Bank Charter Act 1844, Section 1 Issue of notes MoU between HM Treasury, the Bank and the FSA The Bank will be responsible for the overall stability of the financial system as a whole which will involve (1) stability of the monetary system; (2) financial system infrastructure, in particular payments systems at home and abroad; (3) broad overview of the system as a whole; (4) being able in exceptional circumstances to undertake official financial operations; (5) the efficiency and effectiveness of the financial sector, with particular regard to international competitiveness. J. (USA) Federal Reserve Act
Preamble To furnish an elastic currency, to afford for means of rediscounting commercial paper, to establish a more effective supervision of banking in the US and for other purposes. Section 248 The Board of Governors of the Federal Reserve System shall be authorized and empowered: ! examination of accounts and affairs of banks; publication of weekly statements, reports of liabilities and assets of depository institutions; ! permitting or requiring rediscounting of paper at specified rate; ! suspending reserve requirements; ! supervising and regulating issue and retirement of notes; ! adding to or reclassifying reserve cities; ! suspending or removing officers or directors of reserve banks; ! requiring writing off of doubtful or worthless assets of banks; ! suspending operations of or liquidating or re-organizing banks; ! requiring bonds of agents; safeguarding property in hands of agents; ! exercising supervision over reserve banks. Sections 341-361 A Federal reserve bank shall have the following main powers:
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! ! ! ! !
! ! ! ! ! ! !
receive from any of its member banks, or other depository institutions, and from the US, deposits of current funds in lawful money, national bank notes, Federal reserve notes or checks, and drafts, payable upon presentation or other items; discount of obligations arising out of actual commercial transactions; rediscount of notes, drafts, and bills for member banks; discount of acceptance; advances to member banks on their notes; advances to member bank groups, individual member banks on time or demand notes, and individuals, partnerships, and corporations subject to limitations; receive deposits from, from foreign bank subject to restrictions; purchase and sale of cable transfers, acceptances and bills; deal in gold coin and bullion at home or abroad; purchase and sale of obligations of national, State, and municipal governments; establish rates of discount. establish accounts for purposes of open market operations; receive checks and drafts on deposit at par.
Section 391 Federal reserve banks shall act as fiscal agents of the USA.
III.
Monetary Operations
Article 22 In implementing monetary policy, PBC shall employ the following instruments: ! call for deposit reserves at a specified ratio set by PBC; ! set base interest rates; ! rediscount for financial institutions; ! provide loans for commercial banks; ! buy and sell Treasury bonds and other government bonds and foreign exchanges in the open market; and ! other monetary policy instruments defined by the State Council. B. (Canada) Bank of Canada Act
Article 18(k) For the purpose of its open market operations, buy and sell in the open market from or to any person, either in or outside Canada, securities, bills of exchange and promissory notes.
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In fact, the target for the overnight rate is the main tool used by the Canada to conduct monetary policy. C. (ESCB) The European System of Central Banks
Article 18 of the ESCB Statute refers to open market operations (Article 18.1) and discount or credit operations (Article 18.2). Article 19 of the ESCB Statute refers to reserve requirements and Article 20 of the ESCB Statute refers to other instrument of monetary control. D. (Germany) Act concerning the Deutsche Bundesbank
Implement the Euro-systems single monetary policy in Germany, including the refinancing of the German banking system through the Euro-systems monetary policy instruments, (key interest rates, open market operations, standing facilities and minimum reserve system). E. (Japan) Bank of Japan Law
Article 15 The following matters, relating to currency and monetary control, shall be decided by the Policy Board of the Bank: ! determine or altering the basic discount rate, and the types and terms of bills to be discounted; ! determining or altering the basic loan rate and the types, terms, and value of collateral to be used for loans; ! determining, altering or abolishing reserve requirement ratios, the base date, and other matters prescribed by article 4; ! determining or altering the guidelines for money market control through various measures such as buying and selling of bills or bonds prescribed by article 33; ! determining or altering the guidelines for currency and monetary control in other forms; ! determining or altering the Banks view on currency and monetary control. F. Bank of Korea Act
Articles 56 The Monetary Board shall determine the minimum rates of reserve requirements to be held by respective financial institutions and may change them as necessary. Article 64 The Bank may do the following credit business for financial institutions on such terms and conditions as the Monetary Board may determine:
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! !
Rediscount, discount and selling and buying of promissory notes, bills of exchange and other credit instruments received by financial institutions; Term loans within a year with the following instruments offered as security: (a) credit instruments listed in above; (b) negotiable instruments representing obligations of , or guaranteed by the Government; (c) negotiable instruments representing obligations of the Bank.
Articles 68 The Bank may sell and buy the following bonds in open markets on its own account in order to carry out monetary and credit policy on such terms and conditions as the Monetary Board may determine: ! State bonds; ! Securities which the Government guarantees the redemption of their principal and interests; and ! Other securities as determined by the Monetary Board. G. (Poland) Act on the National Bank of Poland
Article 12(2) In consideration of monetary policy guidelines, the monetary policy council shall, in particular, ! set NBP base interest rates; ! determine the procedures governing the reserve requirement and set the reserve ratio; ! set ceilings on the liabilities arising from loans and advances drawn by the NBP from foreign banking and financial institutions; . ! determine the principles applicable to open market operations. Article 42 The NBP may extend refinancing loans to bank, in zloty, in order to replenish their funding. Article 45 The president of the NBP shall announce the discount and rediscount rate for bills, the refinance and Lombard rates, and the regulatory reserve ratio, set by the monetary policy council. Article 48 The NBP shall be entitled to ! issue and sell securities; ! buy and sell Treasury securities under open market operations; ! organize trading in the securities it issues and in Treasury securities.
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H.
(Taipei, China) Central Bank of China
from Articles 19-31 The largest part of the law deals with the various instruments available to the Bank in the exercise of its monetary policy. Articles 21 and 22 deal with pricing controls: to set the rates on rediscount and other facilities it extends and to set depositrate ceilings and to approve loan-rate ranges for banks. More attention is allocated to quantitative controls. Articles 19 and 20 authorize bill rediscounting, other refinancing and temporary advances, while articles 23-31 authorize controls over reserve ratios for bank deposits and investment trusts, liquidity and loanable ratios, installment-credit terms and securities-financing terms for banks. Articles 26 and 27 specifically address open-market operations in government and bank bills and notes, plus in its own CDs and bonds. Those articles and article 20 address what may be used as pre-emptive tools before a lender-of-last-resort role is required: liquidity supply to banks for the short, medium and long term, respectively. I. (UK) Bank of England Act
There is no clear provision on monetary operations except Section 6 & Section 7 of Schedule 2: Section 6 The maintenance of cash deposits with the Bank by certain financial institutions shall have effect. Section 7 of Schedule 2 The benchmark rate of interest for the purposes of papa.6(3) shall be determined (by the monetary policy committee). J. (USA) Federal Reserve Act
Federal Reserve Act 1913, Section 14- Open Market Operations The Federal Open Market Committee is responsible for ! purchasing and sale of cable transfers, bank acceptances and bills of exchange; ! dealings in, and loans on, gold; ! purchasing and sale of obligations of US, states, counties, etc., and of foreign governments; ! purchasing and sale of bills of exchange; ! determining rates of discount; ! purchasing and sale of acceptances of federal intermediate credit banks. Section 357 (Discount Rate)
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Every Federal reserve bank shall have power to establish from time to time, subject to the review and determination of the Board of Governors of the Federal Reserve System, rates of discount to be charged by the Federal reserve bank for each class of paper. Section 461 (Reserve Requirements) The Board of Governors of the Federal Reserve System is authorized to establish applicable definition, payment of interest, obligations as deposits, the amount of reserves, and supplementary reserve requirement in the field of reserve requirements.
IV.
A. 1. (PRC) PBC Law of 1995 Independence Declaration
Independence
Article 7 Under the leadership of the State Council, independently implement monetary policies, perform its functions and carry out its operations. 2. Organic safeguard
(1) Appointment & terms Article 9 The governor is nominated by the Premier of the State Council, and affirmed by the National People's Congress and appointed or removed by the President of the PRC. The deputy governors are appointed or removed by the Premier of the State Council. (2) Suitability Article 13 The governor, deputy governors and other staff of PBC shall be diligent in carrying out their functions, refrain from abuse of power, malpractices for gaining private interests, or holding posts concurrently in any other banking institution, enterprise or foundation. 3. Functional Safeguard
(1) Lending to government or public sector Articles 28 & 29 PBC must not give any overdrawal in exceeding financial budget of the government or directly subscribe to or act as sole sales agent for State bonds and other
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government bonds, must not provide loans to the local governments and governmental department. (2) Financial autonomy Article 40 PBC shall, complete its financial statements, prepare its annual report and publish them in accordance with relevant regulations of the State. Article 37 PBC shall exercise independent control over its financial budget. The budget of PBC shall be incorporated in the central budget. (3) Decisional autonomy Article 2 Formulate and implement monetary policies under the leadership of the State Council. Article 5 Report its decisions concerning the annual supply of banknotes, interest rates, foreign exchange rates, and other major issues specified by the State Council to the State Council for approval before implementation. Carry out decisions on matters concerning monetary policies, but not specified in the preceding paragraph, and report them to the State Council for the record. B. 1. (Canada) Bank of Canada Act Independence Declaration No provision 2. Organic safeguard
(1) Appointment & terms Article 6 The Governor and Deputy Governor shall be appointed by the directors with the approval of the Governor in Council with the terms being 7 years being reappointed. Article 9 The Minister, with the approval of the Governor in Council, shall appoint directors for terms of three years each to the offices of directors then vacant.
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(2) Suitability & salaries Article 6 The Governor and Deputy Governor shall be proven having financial experience. The Governor and Deputy Governor shall be paid such salaries as the directors determine, but no such remuneration shall be in the form of a commission or be computed by reference to the income or profits of the Bank. No person is eligible to be appointed or to continue as Governor or Deputy Governor who ! is not a Canadian citizen; ! is a member of the Senate or House of Commons or a member of a provincial legislature; ! is employed in any capacity in the public service of Canada or a province or holds any office or position for which any salary or other remuneration is payable out of public money; ! except as authorized by or under any Act of Parliament, is a direct, partner, officer, employee or shareholder of an institution referred to in any of paragraphs 10(2)(a)to (e) of this Act; or ! has reached the age of 75 years. Article 10 The directors shall be selected from various occupations. No person is eligible for appointment as a director if that person is a director, partner, officer or employee of any of the following institutions: ! a bank or authorized foreign bank; ! a clearing house or participant, as defined in section 2 of the Payment Clearing and Settlement Act; ! a member of the Canadian Payments Association that maintains a deposit with the Bank; ! an investment dealer that acts as a primary distributor of new Government of Canada securities; or ! an institution that controls, or is controlled by, an institution above. No person is eligible to be appointed or to continue as director who is not a Canadian citizen ordinarily resident in Canada; is employed, on a full-time basis, in any capacity in the public service of Canada or a province or holds any office or position, other than as a parttime member of any board or advisory body of an agency or department of the government of Canada or a province, for which an salary or other remuneration is payable out of public moneys, except that a director may perform temporary services for the government of Canada or a province for which that director may be reimbursed actual travel and living expenses; ! has reached the age of 75 years. Where a director, in the opinion of the Board, becomes permanently incapacitated, that director may be removed from office by resolution of the Board approved by the Governor in Council.
! !
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Article 15 The Board may by by-law establish a pension fund for the officers and employees of the Bank and their dependents. (3) Prohibitions Article 6(2) The Governor and Deputy Governor shall devote the whole of their time to the duties. (4) Liaisons with government Articles 5 & 13 Deputy Minister of Finance shall be a member of the Board of Directors and of the Executive Committee. Article 14(1) The Minister and the Governor shall consult regularly on monetary policy and on its relation to general economic policy. 3. Functional safeguard
(1) Lending to government and public sector Article 18 (i) (The Bank may) make loans or advances for periods not exceeding six months to the Government of Canada or the government of any province on the pledge or hypothecation of readily marketable securities issued or guaranteed by Canada or any province; (2) Decisional Autonomy Article 14(2) If there should emerge a difference of opinion between the Minster and the Bank concerning the monetary policy to be followed, the Minster may, after consultation with the Governor and with approval of the Governor in Council, give to the governor a written directive concerning monetary policy, in specific terms and applicable for a specified period, and the Bank shall comply with that directive. C. 1. (ESCB) The European System of Central Banks Independence Declaration
The EC Treaty contains an explicit declaration of independence in Article 108: When exercising the powers and carrying out the tasks and duties conferred upon them by the Treaty and the Statute of the ESCB, neither the ECB, nor a national central bank, nor any member of their decision-making bodies shall seek or take
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instructions from Community institutions or bodies, from any government of a Member State or from any other body. The Community institutions and bodies and the governments of the Member States undertake to respect this principle and not to seek to influence the members of the decision-making bodies of the ECB or of the national central banks in the performance of their tasks. 2. (1) Organic safeguard
Appointment, suitability and tenure Article 11.2 of the ESCB Statute states that the President, Vice-President and other members of the Executive Board shall be appointed among persons of recognized standing and professional experience in monetary or banking matters by common accord of the governments of the Member States at the level of the Heads of State or Government, on a recommendation from the Council and after it has consulted the European Parliament and the Governing Council. Their term of office shall be eight years and shall not be renewable. Only nationals of Member States may be members of the Executive Board. Article 11.4 of the ESCB Statute provide that if a member of the Executive Board no longer fulfills the conditions required for the performance of his duties or if he has been guilty of serious misconduct, the Court of Justice may, on application by the Council or the Executive Board, compulsorily retire him. Article 14.2 of the ESCB Statute further provides that the Governor of a National Central Bank may be relieved from office only if he no longer fulfils the conditions required for the performance of his duties or if he is guilty of serious misconduct. (2) Prohibitions applicable to officials while in office and after they leave office According to Article 11.1 of the ESCB Statute the members shall perform their duties on a full-time basis. No member shall engage in any occupation, whether gainful or not, unless exemption is exceptionally granted by the Governing Council. Article 38.1 of the ESCB Statute calls for professional secrecy even after duties have ceased. 3. (1) Treaty. The prohibition extends both to direct overdrafts and to purchases of securities directly from the issuer. (2) Financial autonomy Functional safeguard Lending to government and public sector Lending to the public sector is forbidden according to Article 101 of the EC
The financial autonomy of the ESCB is considered in Chapter VI (Articles 26-33) of the ESCB Statute.
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D. 1.
(Germany) Act concerning the Deutsche Bundesbank Independence Declaration
Article 12 In exercising the powers, the Bank shall be independent and not subject to instructions from the Federal government. As far as is possible without prejudice to its tasks, it supports the general economic policy of the Federal government. 2. Organic safeguard
(1) Appointment & terms Article 7(3) The members of the Governing Board shall be appointed by the President of Germany. The President, vice-President and two other members shall be nominated by the Federal government; the other four members shall be nominated by the Bundesrat in agreement with the Government. The Federal government and the Bundesrat consult the Governing Board with regard to their nominations. Members shall be appointed for eight years or in exceptional case for a shorter term of office, but not for less than five years. (2) Suitability and salaries Article 7(2) Members of the Governing Board must have relevant professional qualifications. Article 7(4) Members of the Governing Boards legal relationships with the central bank, and particularly their salaries, retirement pensions and surviving dependants pensions, are regulated by contracts with the Governing Board. Article 29(2) The Bank and its staff enjoy the privileges granted to the Government and its staff in the fields of construction, housing and rent. (3) Liaison with government Article 13 The Bank shall advise the Federal government on monetary policy issues of major importance and furnishes it with information on request. The Federal government invites the President to attend its deliberations on important monetary policy issues. 3. Functional safeguard
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(1) Lending to government and public sector Article 20 From this article, it can be inferred that the central bank may not grant loans to public authorities. (2) Financial autonomy Article 26(2) The annual accounts are be drawn up with due regard to the tasks of the Bank. E. 1. (Japan) Bank of Japan Law Independence Declaration
Article 3 The Banks autonomy regarding currency and monetary control shall be respected. Article 5 In implementing this Law, due consideration shall be given to the autonomy of the Banks business operations. 2. Organic safeguard
(1) Appointment & terms Article 23 The Governor, Deputy Governor, and Deliberative Members shall be appointed by the Cabinet, subject to the consent of the House of Representatives and the House of Councilors. The Executive Directors shall be appointed by the Minister of Finance based on the Policy Boards recommendation. Article 24 The term of office shall be 5 years for the Governor, the Deputy Governor, and the Deliberative Members, 4 years for the Executive Auditors and the Executive Directors, and 2 years for the Counsellors. All of them may be reappointed. Article 25 Executives of the Bank (except for Executive Directors) shall not be dismissed against their will during their term of office except in the specified cases. (2) Liaison with government Article 19
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The Minister of Finance in charge of economic and fiscal policy, may, when necessary, attend and express views at the Policy Board meetings for monetary control matters. Article 56 The Minister of Finance or the Prime Minister may request the Bank to rectify any actual or potential violations of laws, regulations, or by-laws by the Bank, its executives or staff. (3) Suitability & Salaries Article 23 The Deliberative Members shall be appointed from among those with academic expertise or experience including experts on the economy or finance. Article 25 Executives (excluding for Executive Directors) shall not be dismissed against their will during their term of office except in the following case that: ! an executive is adjudicated bankrupt; ! an executive receives penalties under this Law; ! an executive is sentenced to imprisonment or given heavier punishment; ! an executive is deemed incapable of carrying out his duties by the Policy Board because of physical or mental disorders. Article 31 The Bank shall determine the standards of salaries paid to its executives and staff, consistent with the general standards. (4) Prohibitions Article 26 Executives may not engage in any of the following activities during his term of office ! become a candidate for the National Diet, for the assembly of any municipality or for any for any elected public office; ! become an officer of any political body including political parties or actively engage in political activities; ! maintain or take other posts that bring remuneration (except when the Policy Board considers that such post does not interfere with the proper execution of his duties at the Bank); ! engage in commercial or other business for pecuniary gain. Article 32 The Bank shall establish rules on the ethical discipline of its executives and staff, such as the obligations to devote themselves to their duties and to separate themselves from private enterprises.
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3.
Functional safeguard
(1) Lending to government and public sector Article 34 The Bank may conduct the following business with the government: ! making loans, without collateral, subject to a limit imposed by a Diet resolution; ! making loans, without collateral, to finance the governments temporary borrowing permitted under the Fiscal Law other laws; ! subscribing or underwriting government bonds subject to a limit imposed by a Diet resolution; ! subscribing or underwriting financial bills and other bills issued for stopgap financing; ! accepting custody of precious metals and other items. (2) Financial autonomy Article 51 Prepare a budget for general and administrative expenses, and submit it to the Minister of Finance for authorization. (3) Decisional autonomy Article 7 According to an ordinance from the Ministry of Finance and upon authorization from the Minister of Finance, establish, move, or abolish branches and other offices. Article 11 Amendments to the by-laws shall be considered invalid unless authorized by the Minister of Finance and the Prime Minister. Article 15 The matters relating to currency and monetary control shall be decided by the Policy Board. F. 1. Bank of Korea Act Independence Declaration
Article 3 The monetary and credit policy of Bank shall be neutrally established and independently executed, and the autonomy of Bank shall be respected.
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2.
Organic safeguard
(1) Appointment & terms Article 13 The Monetary Boards shall be composed of the following 7 persons: ! President of Korea; ! one member recommended by the Minister of Finance and Economy; ! one member recommended by the governor the Bank; ! one member recommended by the Chairman of the Financial Supervisory Commission; ! one member recommended by the Chairman of the Korea Chamber of Commerce and Industry; ! one member recommended by the Chairman of the National Banks Federation incorporated; and ! one member recommended by the Chairman of the Korea Securities Dealers Associations. The Governor shall concurrently serve as the Chairman of the Monetary Board, and shall be appointed by the President after the deliberation of the State Council. The members listed from item 2 to 7 above shall be appointed by the Governor. Articles 15 The terms of the members listed from item 2 to 7 above shall be 4 years, and they may be re-appointed. Article 33 The term of the Governor shall be 4 years and be reappointed. (2) Suitability Article 13 Members of the Monetary Board shall be experienced in finance, economy or industry. Article 17 No person who falls under any of the following subparagraphs shall be a member: ! a person who is not an national of the Korea; and ! a person who falls under any of subparagraphs of Article 33 of the State Public Official Act. Article 18 No member shall be dismissed against his will during his term of office except where he falls under any of the following subparagraphs: ! where he falls under any of subparagraphs of article 17; ! where he is unable to discharge his duties due to mental disorder and physical disability; and
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where it is improper to discharge his duties as a member for a violation of official duties under this Act.
Article 40 The Governor, the vice Governor, assistant vice Governors and the staff shall execute in good faith the monetary and credit policy. (3) Liaisons with government Article 4 The monetary policy of the Bank shall be in harmony with the governments economic policy to the extent of not impeding the price stabilization. Article 6 The Bank shall, in consultation with the government, set the price stabilization target annually Article 90 The Governor may attend and speak at the State Council. The Government may request the Governor to attend at the State Council. Article 91 The vice Minister of Finance and Economy may be present and speak at a meeting of the Monetary Board. Article 94 The Minister of Finance and Economy, the Monetary Board and the Financial Supervisory Commission may request data one another as necessary to establish policies. (4) Prohibitions Article 19 Members of the Monetary Board shall not join a political party, and shall not involve in political movements. Article 20 Members of the Monetary Board shall not hold any of the following positions or be engaged in any business on a commercial basis during his term of office: ! any position as a National Assemblyman or local councillor; ! any position as a state public official or a local public official; and ! other positions in which remuneration is paid. Article 23 Any member of the MB shall have no right to deicide on matters falling under any of the following subparagraphs: ! any matter in which he himself has direct interest; and
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any matter in which his spouse, relative by blood within the fourth degree or relative by marriage within the second degree has direct interests.
Article 41 The Governor, vice Governor, assistant vice Governors and staff of the Bank shall not be engaged in any business on a commercial basis other than their duties, and shall not hold other duties concurrently unless approved by the appointer concerned. Article 42 The Governor, vice Governor, assistant vice Governors and staff of the Bank shall not extort credit or receive money and other valuables or other benefits from any financial institution or any officer and employee of the institution. 3. Functional safeguard
(1) Lending to government and public sector Articles 75 The Bank may extend overdrafts or another form of credits to the Government and accept government bonds directly from the Government. Article 77 The Bank may extend loans to government agencies. (2) Financial autonomy
Article 98(2) The Bank shall obtain approval in advance from the Minister of Finance and Economy on a budget on expense. (3) Decisional autonomy Article 4 The monetary and credit policy of Bank shall be in harmony with the governments economic policy to the extent of not impeding the price stabilization. Article 92 Where any decision taken by Monetary Board is judged to contradict the government economic policy, the Ministry of Finance and Economy may request MB to reconsider it. G. (Poland) Act on the National Bank of Poland
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1.
Independence Declaration No Provision
2.
Organic safeguard
(1) Appointment & terms Article 9 The President shall be appointed by the Sejm, at the request of the President of the Poland, for a term of 6 years up to two consecutive terms of office. Article 10 The vice President and other members of the NBP Management Board shall be appointed and recalled by the President of the Poland, at the request of the President of the NBP. Article 13 The members of the Monetary Policy Council shall be appointed in equal numbers by the President of Poland, the Sejm and the Senate with a 6 years term of office. (2) Suitability & salaries Article 9 The President of the NBP may be recalled where: ! he has been unable to fulfill his duties due to prolonged illness; ! he has been convicted of a criminal offence under a final and conclusive court verdict; ! the Tribunal of State has prohibited him from occupying managerial positions or holding posts of particular responsibility in state institutions. Article 13 The members of the Monetary Policy Council shall be specialists in finance. The bodies authorized to appoint member of the Monetary Policy Council shall recalled solely in the event of: ! their resignation from their posts; ! illness which permanently prevents them from performing their responsibilities; ! a conviction for a criminal offence under a final and conclusive court verdict; ! is a member of a political party or trade union. Article 14 Members of the Monetary Policy Council shall be entitled to remuneration equivalent to that of Vice Presidents of the NBP. (3) Prohibitions Articles 14 & 18
Members of the Monetary Policy Council and of Management Board shall not hold other positions nor engage in gainful or public activity other than academic work, teaching or writing. (4) Liaison with government Article 15 A representative of the Council of Ministers may participate in meetings of the Monetary Policy Council without voting rights. This representative may submit motions for the consideration of the Monetary Policy Council. Article 21 In discharging its responsibilities, the NBP shall collaborate with the appropriate bodies of central government in developing and implementing national economic policy, in so doing striving to ensure the proper performance of monetary policy guidelines, and in particular shall: ! submit monetary policy guidelines to bodies of central government and also reports on the performance of monetary policy and on the situation within the banking system; ! collaborate with the Minister of Finance in developing central government financial plans; ! present its opinion on draft legislation relating to economic policy; ! present its opinion on draft legislation concerning the operations of banks and on other legislation of significance to the banking system. Article 22 The President of the NBP may attend meetings of the Sejm and the Council of Ministers. 3. Functional safeguard
(1) Decisional autonomy Article 24 The NBP shall carry out the foreign exchange policy established by the Council of Ministers in consultation with the monetary with the monetary policy council. H. (Taipei, China) Central Bank of China
from Articles 1, 5, 6, 11 and 34 There are no specific provisions relating to independence. Since the Bank is an agency under the Executive Yuan and there are no specific prohibitions against financing the governments deficits through securities purchases or against other potential political uses of its powers, there is room to question the Banks independence, in theory. 5-year terms for the Directors and Executive Board appointees and large, somewhat diverse panel of them could provide some independence of decision-making. All are nominated
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by the Executive Yuan and approved by the President a process, which might increase the inertia of the institution and reduce the political diversity of its constituents. Article 34 allows intervention in the foreign-exchange market under the cover of maintaining and orderly market but for the purpose of managing the balance of payments. While the former rationale is part of the financial-stability mandate, the latter is susceptible to political management. I. 1. (UK) Bank of England Act Independence Declaration No provisions 2. Organic safeguard
(1) Appointment & terms Section 1 The Governor, Deputy Governors and directors of the Bank shall be appointed by Her Majesty. Section 3 The Chancellor may designate one of the directors to chair the sub-committee. Section 13 Among 6 members of the Monetary Policy Committee, 2 are appointed by the Governor after consultation with the Chancellor, and 4 are appointed by the Chancellor. Schedule 1, paras. 1-2, Schedule 3, para. 1 The terms of office of Governor or Deputy Governor are 5 years and that of director and of member of the Monetary Policy Committee is 3 years. (2) Suitability & salaries Schedule 1, paras. 5 A person is disqualified for appointment as Governor, Deputy Governor or director of the Bank if he is a Minister, or a person serving in a government department in employment in respect of which remuneration is payable out of money provided by Parliament. A member is disqualified for appointment as director of the Bank if he is a servant of the Bank. Schedule 1, para. 8
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The Bank may, with the consent of the Chancellor, remove a person from office as Governor or Deputy Governor or director of the Bank if it is satisfied: ! that he has been absent from meetings of the court for more than 3months without the consent of the court; ! that he has become bankrupt, that his estate has been sequestrated or that he has made an arrangement with or granted a trust deed for his creditors, or ! that he is unable or unfit to discharge his functions as a member. Schedule 1, paras. 14-15 The Governor, Deputy Governor, or directors shall be paid by the Bank such remuneration as the Bank may determine. The Bank may pay, or create and maintain a fund for the payment of, pensions or capital grants to members, or former members, of the court who have rendered exclusive services to the Bank. A director of the Bank shall be entitled to be paid by the Bank such remuneration as the Bank may determine with the approval of the Chancellor. Schedule 3, para. 5 A person is disqualified for appointment as member of the Monetary Policy Committee if he is a Minister, or a person serving in a government department in employment in respect of which remuneration is payable out of money provided by Parliament, or he is a member of the court of directors of the Bank. (3) Prohibitions Schedule 1, paras. 1-2 The Governor or Deputy Governor shall work exclusively for the Bank. Section 3(5) & Schedule 1(13) If a member of the sub-committee or of the court has any interest in any dealing or business with the Bank, he shall have no vote in relation to the dealing or business. (4) Liaisons with government Schedule 3, para. 13 A Treasurys representative may attend, and speak at, any meeting of the monetary policy committee. Section 12 The Treasury may by notice in writing to the Bank specify what price stability is to be taken to consist of, or what the economic policy of the government is to be taken to be. 3. Functional safeguard
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(1) Financial autonomy Section 7 The Bank shall prepare for each of its financial years a statement of accounts consisting of balance sheet and a profit and loss account. (2) Decisional autonomy Section 19 The Treasury, after consultation with the Governor, may by order give the Bank directions on monetary policy if they are satisfied that the directions are required in the public interest and by extreme economic circumstances. Schedule 2, paras. 1, 2 & 8 The Treasury may by order define and amend the definition of eligible institutions, eligible liabilities, specify value bands and the ratios, amend or replace the provisions governing the determination of the benchmark rate of interest. J. 1. (USA) Federal Reserve Act Independence Declaration No Provision 2. Organic safeguard
(1) Appointment & terms Section 241 Members of the Board shall be appointed by the President, by and with the advice and consent of the Senate, for terms of 14 years. Section 242 Among the members, two shall be designated by the President, by and with the advice and consent of the Senate, to serve as Chairman and Vice Chairman of the Board, respectively, for a term of 4 years. Section 261 Each Federal reserve bank by its board of directors shall annually select from its own Federal reserve district one member of the Federal Advisory Council. Section 302 Members of board of directors of a Federal reserve bank shall hold office for 3 years and be divided into 3 classes subject to different choosing procedures. (2) Suitability & salaries Section 241
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The members of the Board shall devote their entire time to the business of the Board, and shall each receive basic compensation at the rate of US$16,000 per annum, together with actual necessary travelling expenses. Section 261 Member of the Federal Advisory Council shall receive such compensation and allowances fixed by his board of directors subject to the approval of the Board. (3) Prohibitions Section 242 The members of the Board shall be ineligible during the time they are in office and for 2 years thereafter to hold any office, position, or employment in any member bank. Section 244 No member of the Board shall be an officer or director of hold stock in banks, trust companies, and federal reserve bank. Section 303 No Senator or Representative in Congress shall be a member of the Board or an officer or a director of a Federal reserve bank. No director of class B shall be an officer, director, or employee of any bank. No director of class V shall be an officer, director, employee, or stockholder of any bank. 3. Functional safeguard
(1) Decisional autonomy Section 245 The President shall have power to fill all vacancies that may happen on the Board of Governors during the recess of the Senate. Section 246 Any power of the Board in conflict with the powers of the Secretary of the Treasury shall be exercised subject to the supervision and control of the Secretary.
V.
Organization
Article 9 PBC shall have a governor and a certain number of deputy governors.
Article 11 PBC shall establish the monetary policy committee. B. 1. (Canada) Bank of Canada Act Board of Director
Article 5 (1) The Bank shall be under the management of a Board of Directors consisting of a governor, a deputy governor and 12 directors. The Deputy Minister of Finance shall be a member of the board. 2. Executive Committee
Article 13 The Board has an Executive Committee consisting of the governor, the deputy governor and not less than two or more than four directors selected by the Board, The Deputy Minister of Finance shall be a member of Executive Committee. The Executive Committee is competent to deal with any matter within the competence of the Board. C. (ESCB) The European System of Central Banks
The ESCB consists of the European Central Bank (ECB) and the National Central Banks (NCBs) of the EU Member States (Article 107.1 of the EC Treaty). Among these 16 legal entities, the ECB and the NCBs of the 12 Member States which have adopted the Euro act as the monetary authority of the EC. To avoid confusion with the ESCB including the NCBs of the UK, Denmark and Sweden, the ECB plus the 12 NCBs participating States are called the Eurosystem. The Eurosystem is governed by the Executive Board and the Governing Council, which are the decision making bodies of the ECB (Article 107.3 of the EC Treaty): (1) the Executive Board (Article 11 of the ESCB Statute) is composed of the President, the Vice President and four other members, appointed at EU level and responsible for day-to-day management. (2) the Governing Council (Article 10 of the ESCB Statute) is composed of the Executive Board plus NCB Governors of the Eurozone States. The Governing Council takes major monetary policy decisions and convenes monthly. In addition to these bodies of the Eurosystem, there is a third body, called the General Council (Article 45 of the ESCB Statute), which comprises the Eurosystem NCBs and the other three NCBs not participating in EMU.
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D.
(Germany) Act concerning the Deutsche Bundesbank
Article 7(1) & (2) The governing body of the Bank shall be the Governing Board. It shall govern and manage the Bank. The Governing Board shall comprise the president, vice-president and six other members. Article 7(5) The Governing Board shall take its decisions by a simple majority of the votes cast. In the event of a tie, the chairman has the casting vote. When distributing responsibilities among the members of the Governing Board, no decision may be taken without the Presidents approval. E. 1. (Japan) Bank of Japan Law Policy Board
Article 14 A Policy Board shall be established in the Bank of Japan. Article 16 The Policy Board shall be composed of nine members. The governor and deputy governors shall perform their duties as Policy Board members independently of each other. The Policy Board shall have a chairman, to be elected by Policy Board members from among themselves. The chairman shall exercise general control over the Policy Board business. Article 17 The chairman shall regularly call Policy Board meetings, at which monetary control matters are to be discussed. Article 18 The Policy Board may neither meet nor vote unless the chairman and two-thirds or more of the total incumbent policy board members are present. Matters shall be decided by a majority of votes cast by members who are present. When the votes are equally split, the chairman shall make a final decision. Except where otherwise specified in this Law, necessary matters concerning management of Policy Board meetings, such as the procedures for Policy Board discussion, shall be determined by the Policy Board. Article 19
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The Minister of Finance and the minister who is in charge of economic and fiscal policy may, when necessary, attend and express views at policy meetings for monetary control matters, or may each designate a staff member of the Ministry of Finance or the Cabinet Office, respectively, to attend and express view at such meeting. The Minister of Finance and the minister for economic and fiscal policy, when attending the Policy Board meetings for monetary control matters, may submit proposals regarding monetary control matters, or request that the Policy Board postpone a vote on monetary control matters until the next Policy Board meeting of this type. If a request is made to postpone a Policy Board vote, the Policy Board shall decide whether or not to accommodate the request. 2. Executives
Article 21 The executives of the Bank of Japan shall consist of six deliberative members, a governor, two deputy governors, three or less executive auditors, six or less executive directors, and a few counselors. Article 22 The governor shall represent the Bank of Japan and exercise general control over the Banks business in accordance with decisions made by the Policy Board. F. 1. Bank of Korea Act Monetary Board
Articles 12 A Monetary Board as a policy-making body shall be established within the Bank. Article 13 The Monetary Boards shall be composed of the following 7 persons: ! President of Korea; ! one member recommended by the Minister of Finance and Economy; ! one member recommended by the governor the Bank; ! one member recommended by the Chairman of the Financial Supervisory Commission; ! one member recommended by the Chairman of the Korea Chamber of Commerce and Industry; ! one member recommended by the Chairman of the National Banks Federation incorporated; and ! one member recommended by the Chairman of the Korea Securities Dealers Associations. Articles 21 Any meeting of MB shall be convened by the Chairman where the chairman deems necessary or not less than two members request.
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Except as otherwise provided for in this Act, decisions of the meetings of the Monetary Board shall be taken with attendance of not less than 5 members and by affirmative votes of a majority of members present. 2. Executive organs
Article 32 The Bank shall have one Governor, one Vice-Governor and five or less assistant Vice Governors. Article 33 The Governor shall represent the Bank, and exercise general control over its affairs. Article 34 The Governor shall carry out policies established by the Monetary Board and exercise other powers granted under this Act and the Articles of Incorporation. G. 1. (Poland) Act on the National Bank of Poland President
Article 11.2 The President chairs the Monetary Policy Council, the Management Board and the Commission for Banking Supervision, and shall represent the NBP in its external contact. 2. Monetary Policy Council
Article 12 The Monetary Policy Council shall draw up annual monetary policy guidelines and submit these to the Sejm, assess the activity of the NBP management board in its performance of monetary policy guidelines. The Monetary Policy Council shall adopt accounting principles of the NBP, to be submitted by the president of the NBP. Article 13 The Monetary Policy Council shall be composed of the chairperson of the monetary policy council, who is the President of the NBP, and 9 members. Article 16 Meetings of the Monetary Policy Council shall be convened by the Chairperson at least once a month. The Monetary Policy Council shall rule in the form of resolutions adopted by a majority vote, in the presence of at least five members, including the Chairperson. In the event of a tied vote, the Chairperson of the Monetary Policy Council shall have a casting vote.
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3.
Management Board
Article 17 The activity of the NBP shall be directed by its Management Board. The NBP Management Board shall be composed of the president of the NBP in his/her capacity as chairperson, and from six to eight other board members, of which two shall be vice presidents of the NBP. Article 19 Resolutions of the NBP Management Board shall be adopted by a majority vote, and in the event of a tied vote, the President of the NBP shall have a casting vote. H. (Taipei, China) Central Bank of China
from Articles 5-10 The Bank uses a two-tier directorate plus a supervisory board to plan and manage policy and to supervise operations. The Board of Directors (11 to 15), including the Governor of the Bank and the Ministers of Finance and of Economic Affairs (all three, ex-officio), is nominated by the parliament (Executive Yuan) and appointed by the national President. At least one Director will come from the agricultural, banking and industrial-commercial sectors, respectively. 7 Executive Directors are drawn from the board to form the Executive Board of Directors, to whom the Board delegates many of its powers and whose resolutions the Board must approve. The term of all Directors is 5 years and they may be re-appointed after each term, with no stated limit on the number of times. The Board of Supervisors is nominated by the parliament and appointed by the national President. The 5-7 supervisors, except for the Director General of the Budget of the parliament, serve terms of 3 years and may be re-appointed. The head office may establish 8 departments to cover its operations: Banking, Issuance, Foreign Exchange, Treasury, Bank Examination, Economic Research, the Secretariat and Accounting. I. 1. (UK) Bank of England Act Court of directors
Section 1 There shall continue to be a court of directors of the Bank, consisting of a Governor, 2 Deputy Governors and 12 directors of the Bank. Section 2 The court of directors shall manage the Banks affairs, other than the formulation of monetary policy.
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Section 3 The functions mentioned in section 2 shall stand delegated to a sub-committee of the court of directors of the Bank consisting of the directors of the Bank. Schedule 1, para. 12 The court of directors shall meet at least once a month. The Governor the Bank (or in his absence a Deputy Governor of the Bank) may summon a meeting, at any time on giving such notice as in his judgment the circumstances may require. Schedule 1, para.13(3) The Governor takes the chair of a meeting of the court. 2. Monetary Policy Committee
Section 13 There shall be a committee of the Bank, to be known as the Monetary Policy Committee, which shall have responsibility within the Bank for formulating monetary policy. The monetary policy committee shall consist of the Governor, Deputy Governors, and 6 members. Schedule 3, para. 10(1)(2) The Monetary Policy Committee shall meet at least once a month. The governor the Bank (or in his absence a deputy governor of the Bank with executive responsibility for monetary policy) may summon a monetary policy committee meeting, at any time on giving such notice as in his judgment the circumstances may require. Schedule 3, para. 11(3)-(5) The chair of a monetary policy committee meeting shall be taken by the governor of the Bank. Decisions shall be taken by a vote of all those members present at the meeting. In the event of a tie, the chairman shall have a second casting voting. Schedule 3, para. 14 The Monetary Policy Committee shall submit a monthly report on its activities to the court of directors. J. 1. (USA) Federal Reserve Act Board of Governors
Section 241 The Board of Governors of the Federal Reserve System shall be composed of 7 members. In selecting the members of the Board, not more than one of whom shall be selected from any one Federal Reserve district.
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Section 244 At meeting of the Board the chairman shall preside, and in his absence, the vice chairman shall preside. 2. Federal Advisory Council
Section 261 There is created a Federal Advisory Council, which shall consist of as many members as there are Federal reserve districts. The meetings of the Federal Advisory Council shall be held at lest four times each year, and oftener if called by the Board. The Federal Advisory Council may select its own officers and adopt its own methods of procedure and a majority of its members shall constitute a quorum for the transaction of business. Section 262 The Federal Advisory Council shall have power: ! to confer directly with the Board of Governors on general business conditions; ! to make oral or written representations concerning matters within the jurisdiction of said board; ! to call for information and to make recommendations in regard to discount rates, rediscount business, note issues, reserve conditions in the various districts, the purchase and sale of gold or securities by reserve banks, open market operations by said banks, and the general affairs of the reserve banking system. 3. Federal Open Market Committee (FOMC)
Section 263 There is created a Federal Open Market Committee (FOMC) which shall consist of the members of the Board of Governors of the Federal Reserve System and 5 representatives of the Federal Reserve banks to be selected. Such representatives shall be presidents or first vice presidents of Federal Reserve banks. The meetings of the FOMC shall be held at least four times each year upon the call of the chairman of the Board or at the request of any three member of the FOMC
VI.
A. (PRC) PBC Law of 1995 No provision B.
Lender of last resort
(Canada) Bank of Canada Act
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No provision C. (ESCB) The European System of Central Banks
The ESCB does not have a clear supervisory role. With regard to lender of last resort operations, the ECB has competence to act as lender of last resort (LOLR) in the case of an explicit payment system gridlock, according to Article 105.2 of the EC Treaty. However, if a crisis does not originate in the payment system, it is not clear from the language of the Statute and the language of the Treaty whether the ECB has competence to act as LOLR. According to some commentators a degree of constructive ambiguity is desirable in the case of crisis management, and ambiguity is what the EC law provides. Ambiguity provides scope for different or even contrasting or possibly conflicting interpretations. The silence on this point has been interpreted by some as a positive sign of the desire of the Treaty negotiators to assign responsibility at the ESCB level with respect to LOLR operations and by some others as a negative signal of those same negotiators on the same point. The latter argue that the LOLR responsibility remains at the national level because it has not been specifically transferred. That is, the national central banks in their capacity as national agencies are ultimately responsible for the decision on whether or not to grant emergency liquidity assistance. However, in my opinion, the wording of the subsidiarity principle (Article 5 of the EC Treaty) leaves the door open for a possible Community competence, which could be exercised either directly by the ECB or by the NCBs in their capacity as operational arms of the ESCB. In addition, the second indent of Article 18.1 of the ESCB Statute regarding credit operations could be interpreted creatively to allow for such a role. Furthermore, in the case of a general drying-up of liquidity that is due, for example, to a sudden drop in stock market prices that triggers a market-wide liquidity shortfall, the ECB could act through what has been called the market operations approach to lending of last resort. The Banking Supervision Committee of the ECB 10 has recently published a Memorandum of understanding on high level principles of co-operation between banking supervisors and central banks of the EU in crisis management.11 However, whether or not the existing co-operative arrangements will really work remains to be tested. It will take the first pan-European crisis to cast some light on this issue.
10
The Banking Supervision Committee of the ECB brings together banking supervisors from all EU Member States,
and not just from those participating in EMU. It also assists in the preparation of the ECBs advice on draft banking legislation as specified in Article 105.4 of the EC Treaty.
11
This MoU was published on 10 March 2003. See http://www.ecb.int. This MoU which is not a public document is
simply a contribution to other co-operation arrangements.
274
The possibility of conferring a supervisory role and a lender of last resort role upon the ESCB is foreseen in the so-called enabling clause (article 105.6 of the EC Treaty) which states: The Council may, acting unanimously on a proposal from the Commission and after consulting the ECB and after receiving the assent of the European Parliament, confer upon the ECB specific tasks concerning policies relating to the prudential supervision of credit institutions and other financial institutions with the exception of insurance undertakings. D. (Germany) Act concerning the Deutsche Bundesbank No provision E. (Japan) Bank of Japan Law
Article 37 The Bank of Japan may provide uncollateralized loans to financial institutions and other financial business entities prescribed by a Cabinet Order for a period within that prescribed by a Cabinet Order when they unexpectedly experience a temporary shortage of funds for payment due to accidental causes, whereby the business operations of the financial institutions may be seriously hampered if the shortage is not recovered swiftly, provided that the advance is necessary to secure the smooth settlement of funds among financial institutions. Article 38 The Prime Minister and the Minister of Finance may request that the Bank of Japan conduct the business necessary to maintain an orderly financial system, including provision of loans, when it is believed to be especially necessary for the maintenance of an orderly financial system including the case where it is judged that a serious problem in an orderly financial system may arise. At the request of the Prime Minster and Minster of finance, the Bank may conduct business necessary to maintain an orderly financial system, including provision of loans under special conditions. F. Bank of Korea Act
Article 65 The Bank may, in any of the following subparagraphs, extend credits to any financial institutions secured on assets whose properness has been temporarily granted with the consent of not less than four members: ! Where it extends credits temporarily to any financial institution in a vital emergency in which the stabilization of currency and banking business are directly threatened; and ! Where it extends credits temporarily recognized as creating serious obstacles to discharging its affairs through a temporary deficiency in payment funds to
275
financial institutions due to disorder in computer data processing system or any accident. G. (Poland) Act on the National Bank of Poland
Article 42 The NBP may also extend refinancing to banks for the implementation of a bank rehabilitation program. H. (Taipei, China) Central Bank of China
No explicit provision; although there are pre-emptive liquidity-provision powers in Articles 20, 26 and 27. I. (UK) Bank of England Act
No clear provision. According to MoU between HM Treasury, the Bank and the FSA one of the Banks responsibilities is to undertake official financial operations in exceptional circumstances in order to limit the risk of problems in or affecting particular institutions spreading to other parts of the financial system. J. (USA) Federal Reserve Act
Regulation A (12 C.F.R. 201 as amended effective 9 January 2003), Section 201.4(b) A Federal Reserve bank also may extend longer-term secondary credit if the Reserve bank determines that such credit would facilitate the orderly resolution of serious financial difficulties of a depository institution. Credit extended under the secondary credit program is granted at a rate above the primary credit rate.
VII. Accountability and Transparency

A. 1. (PRC) PBC Law of 1995 Reporting
Article 6 PBC shall submit to the Standing Committee of the National People's Congress an annual report on monetary policies. 2. Publication
276
Article 40 PBC shall prepare annual reports and financial statements and publish them. 3. Auditing
Article 39 The auditing department of the State Council and the Ministry of Finance shall audit the PBC. B. 1. (Canada) Bank of Canada Act Reporting
Article 28(5) The Minister may require the auditors to report to the Minister on the adequacy of the procedure adopted by the Bank. Articles 29 The Bank shall, as soon as practicable after the close of business on Wednesday of each week, make up and transmit to the Minister a balance sheet. Article 30 The Bank shall, on or before the seventh day of each month ! make up and transmit to the Minister a balance sheet; ! provide to the Minster information regarding the Banks investments in securities issued or guaranteed by the Government of Canada. 2. Publication
Article 19(2) The Bank shall cause the policies, standards and procedures to be published in the Canada Gazette. Article 21 The Bank shall at all times make public the minimum rate at which it is prepared to make loans or advances. Article 29(5) A copy of balance sheet shall be published in the issue of the Canada Gazette next following the transmission of each to the Minister. 3. Auditing
Article 28(1)
277
The Governor in Council shall, on the recommendation of the Minister, appoint two firms of accountants eligible to be appointed as auditors of a bank to audit the affairs of the Bank. C. (ESCB) The European System of Central Banks
Article 15.1 of the ESCB Statute establishes that the ECB shall publish quarterly reports on the activities of the ESCB. Article 15.2 states that a consolidated financial statement of the ESCB shall be published each week. Article 15.3 provides that the ESCB shall address an annual report on the activities of the ESCB and on the monetary policy of both the previous and the current year to the European Parliament, the Council and the Commission and also to the European Council. Article 113.3 states that The President of the ECB shall present this report to the Council and to the European Parliament which may hold a general debate on that basis. Article 35 of the ESCB Statute ensures that the acts of the ECB are subject to the same judicial control as the acts of other Community institutions. Article 27.1 of the ESCB Statute refers to the need for the accounts of the ECB and the national central banks to be audited by independent external auditors recommended by the Governing Council and approved by the Council. D. 1. (Germany) Act concerning the Deutsche Bundesbank Reporting
Article 26(5) The annual accounts, the standard cost account, the investment plan and analysis of the budgeted figures and the auditors report shall be forwarded to the Federal Ministry of Finance and the Federal Court of Auditors. Except the standard cost account, the documents above shall be presented to the Bundestag. 2. Publication
Article 26(2) The annual accounts shall be published. Article 33 The Bank shall publish announcements intended for the general public. 3. Auditing
Article 26(3) The annual accounts shall be audited by one or more independent auditors appointed by the Governing Board.
278
E. 1.
(Japan) Bank of Japan Law Reporting
Article 45 The Bank shall submit a written statement of manners of conducting business to the Minister of Finance and the Prime Minister. Article 54 The Bank shall, approximately every six months, prepare and submit to the Diet through the Minister of Finance, a report on the Policy Boards decisions regarding monetary control matters. The Bank shall endeavor to explain to the Diet the report. Article 59 The Bank shall report to the Minister of Finance rules regarding the organization or other matters other than those prescribed by this Law. 2. Publication
Article 20 After each Policy Board meeting for monetary control matters, the chairman shall publish documents containing outline of the discussion at the meeting upon its approval at another Policy Board meeting for monetary control matters. Article 55 The Bank shall publicly announce the outline of its business operations. 3. Auditing
Article 57(1) The Minister of Finance or the Prime Minister may request the Executive Auditors of the Bank to inspect the deeds of the Bank and other necessary matters. F. 1. Bank of Korea Act Reporting
Article 96 The Bank shall prepare a report on the execution situations of monetary and credit policies at least once annually and submit it to the National Assembly. The Governor shall attend and reply where the National Assembly or any of its committee requests him to attend in connection with the report submitted. Article 98(5) The Governor shall submit the years statement of accounts to the Minister of Finance and Economy within 2 months after the closing the fiscal year concerned.
279
Article 102 The Bank shall submit an annual report to the government. 2. Publication
Article 5 The Bank shall make efforts to secure the publicness and transparency in the execution of its business and the operations of machinery. Article 24 The Monetary Board shall make the minutes of its decision public on such terms and conditions as the Monetary Board may determine. Article 102 The Bank shall publish an annual report. 3. Auditing
Articles 43 & 45 The auditor, appointed by the President of Korea, shall audit the affairs of the Bank. Article 95 The Bank shall be audited annually by the Board of Audit and Inspection. G. 1. (Poland) Act on the National Bank of Poland Reporting
Articles 12 The Monetary Policy Council shall submit annual monetary policy guidelines to the Sejm. The Monetary Policy Council shall present a report to eh Sejm on the performance of monetary policy guidelines within five months of the end of the fiscal year. Article 23 Acting on behalf of the Monetary Policy Council, the President (1) shall submit to the Sejm and Council of Ministers: ! quarterly reports on the balance of payment; ! annual balances of the assets and liabilities of central government. (2) forward to the Council of Ministers and Minster of Finance draft monetary policy guidelines, opinions on the draft Budget, balance of payments projections and the rulings of the Monetary Policy Council.
280
Articles 69 The President of the NBP shall submit the annual accounts of the NBP to the Council of Ministers for approval. Article 70 The President of the NBP shall submit the annual report on the NBPs activity to the Sejm. 2. Publication
Article 16 The positions taken by the Monetary Policy Council members during votes shall be published. After a period of six weeks, yet no later than three months from the date the resolution is adopted. Articles 53 Resolutions of the Monetary Policy Council and of the NBP Management Board shall be promulgated in the Official Gazette. Article 54 The President of the NB P shall publish the Official Gazette of the NBP in which the following, in particular, shall be promulgated: ! resolutions of the Monetary Policy Council and of the Management Board concerning the operations of banks; ! annual accounts; ! announcements regarding the establishment, liquidation or bankruptcy of banks; ! announcements of he President of the NBP concerning the refinance and Lombard rates, the discount and rediscount rate for bills, and the regulatory reserve ratio. 3. Auditing
Article 8 The activities of the NBP shall be subject to internal audit. Article 69 The Council of the Ministers shall appoint a commission charged with auditing and assessing the annual accounts of the NBP. H. (Taipei, China) Central Bank of China
from Articles 8, 17, 21 and 40-41
281
Budgeting, review and audit functions are all carried out within the Bank. There is no explicit requirement for external reporting of these results, although the Fiscal Reporting Law may pull them into broader review. No external review is required of the Boards decisions, but all money-pricing decisions must be made public and the amount and reserve status of the currency in issue are to be published at regular intervals. I. 1. (UK) Bank of England Act Reporting
Section 4 The Bank shall make to the Chancellor a report on its activities. The Chancellor shall lay copies of every report before Parliament. Section 7(6) The Bank shall send a copy of the auditing report and the statement to the Chancellor. 2. Publication
Section 4(5) The Bank shall publish every annual report as it thinks appropriate. Sections 14 & 15 The Bank shall publish a statement as to whether it was decided at the Monetary Policy Committee meeting that the Bank should take any action, other than action by way of intervening in financial markets Section 18 The Bank shall publish a reporting containing a review of the monetary policy decision published by the Bank, as assessment of the developments in inflation in the economy, and an indication of the expected approach to meeting the Banks objectives. 3. Auditing
Section 7(5) The Bank shall appoint an auditor to audit its accounts. J. 1. (USA) Federal Reserve Act Reporting
Section 225a The Board shall transmit to the Congress independent written reports
Section 247 The Board shall annually make a full report of its operations to the Speaker of the House of Representatives. Federal Reserve Act 1913, Section 2B The Chairman of the Board shall appear before the Congress at semi-annual hearings, before the Committee on Banking and Financial Services of the House of Representatives, before the Committee on Banking, Housing, and Urban Affairs of the Senate. The Board shall submit a written report to the two Committees above on a discussion of the conduct of monetary policy, and other economic issues. 2. Auditing
Section 248b The Board shall order an annual independent audit of the financial statements of each Federal reserve bank and the Board.
VIII. Relations with other institutions

A. (PRC) PBC Law of 1995 No provision B. (Canada) Bank of Canada Act See liaisons with the government in the independence section C. (ESCB) The European System of Central Banks
According to Article 113.1 of the EC Treaty, the President of the Council and a member of the Commission may participate, without having the right to vote, in meetings of the Governing Council of the ECB. Article 113.2 stipulates that The President of the ECB shall be invited to participate in Council meeting when the Council is discussing matters relating to the objectives and tasks of the ESCB. D. (Germany) Act concerning the Deutsche Bundesbank
Banking Act of 2002, Article 7
283
The Federal Financial Supervisory Authority and the Deutsche Bundesbank shall cooperate. Such cooperation shall encompass the ongoing monitoring of institutions by the Deutsche Bundesbank See also liaison with the government in the independence section. E. (Japan) Bank of Japan Law
Article 4 The Bank shall always maintain close contact with the government and exchange views. Article 44(3) At the request of the Commissioner of the Financial Services Agency, the Bank may submit the results of on-site examinations or other information to the Commissioner. See also liaison with the government in the independence section. F. Bank of Korea Act See liaisons with the government in the independence section. G. (Poland) Act on the National Bank of Poland See liaisons with the government in the independence section. H. (Taipei, China) Central Bank of China
from Article 5 Outside Director nomination by the Executive Yuan; although, the presence of the Minister of Finance and the Minister of Economic Affairs on the Board and Executive Board implies some liaisons. from Articles 36-38 The Bank acts as fiscal agent for the government, undertaking Treasury operations for cash and other securities management and the issuance and redemption of government securities. These functions may be delegated to other institutions. The Bank is examiner of all financial institutions on behalf of the Ministry of Finance, which implies a reporting relationship. It may delegate that examination to other government financial institutions for credit cooperatives and farmers associations. I. (UK) Bank of England Act
Schedule 7, para. 3
284
The Bank shall disclose information to specified authorities. MoU between HM Treasury, the Bank and FSA The FSA and the Bank establish information sharing and secondments arrangement. There will a Standing Committee of representatives of the Treasury, the Bank and the FSA. See also liaison with government in the independence section. J. (USA) Federal Reserve Act No provision
IX
A.
Supervisory Responsibilities
(PRC) PBC Law of 1995
Banking regulation and supervisory function has been transferred to the newlyestablished the China Banking Regulatory Committee. B. (Canada) Bank of Canada Act No provision C. (ESCB) The European System of Central Banks The ESCB does not have clear supervisory role. D. (Germany) Act concerning the Deutsche Bundesbank
Under the Act on the integrated supervision of financial services on 1 May 2002, an integrated supervisor, German Financial Supervisory Authority, was formed. However, the Parliament ordained the Bundesbank's involvement in banking supervision in article 7 of the Banking Act of 2002. E. (Japan) Bank of Japan Law
Article 44
285
The Bank of Japan may enter into a contract with financial institutions which become the correspondents in such business regarding on-site examinations. F. Bank of Korea Act
The bank supervision responsibilities were separated from BOK and only indirect and limited supervisory powers are assigned. Article 87 The Bank has right to request of financial institutions for submission of data for the discharge of monetary and credit policy. Article 88 The Bank may request for inspection of financial institution or joint inspection with Financial Supervisory Service for the discharge of monetary and credit policy. G. (Poland) Act on the National Bank of Poland
Article 25 The activities of banks shall be supervised by the Commission for Banking Supervision under the NBP. H. (Taipei, China) Central Bank of China
from Articles 38-39 The Bank is examiner of all financial institutions on behalf of the Ministry of Finance. It also conducts its own research and compiles economic and financial data to support that work and its exercise of monetary policy. I. (UK) Bank of England Act
Part III of the Bank of England of 1998 Transfer of supervisory functions of the Bank to the Financial Services Authority. MoU between HM Treasury, the Bank and the FSA The Bank will be responsible for the overall stability of the financial system as a whole. J. (USA) Federal Reserve Act
One of bank regulators. Section 248
286
Examination of accounts and affairs of banks; publication of weekly statements, reports of liabilities and assets of depository institutions; requiring writing off of doubtful or worthless assets of banks; suspending operations of or liquidating or reorganizing banks.
X.
A. 1. (PRC) PBC Law of 1995 Capital
Finance and accounting
Article 8 All capital of the PBC is allocated by the State and owned by the State. 2. Profits
Article 38 PBC shall turn over to the State treasury the entire net profit from its every accounting fiscal yearly income minus necessary deductions Losses sustained by PBC shall be offset by State allocations. 3. Accounting
Article 39 PBC shall abide by the unified State accounting system and be subject to the respective auditing and supervision of the audit institution and the financial department of the State Council. B. 1. (Canada) Bank of Canada Act Capital
Article 17 The capital is 5 million and may be increased from time to time. 2. Accounting
Article 29 The Bank shall prepare a balance sheet. C. (ESCB) The European System of Central Banks
287
Article 28 of the ESCB Statute deals with the capital of the ECB and states in its second paragraph that the national central banks shall be the sole subscribers to and holders of the capital of the ECB. Article 29 establishes the key for capital subscription. Chapter VI of the ESCB Statute (articles 26-33) deals with the Financial Provisions of the ESCB. D. 1. (Germany) Act concerning the Deutsche Bundesbank Capital
Article 2 The central banks capital, amounting to 2.5 billion euro, is owned by Germany. 2. Profits
Article 27 The net profit are distributed in the following order (a) 20% of the profit, but at least 250 million euro, are transferred to the statutory reserves until they equal 2.5 billion euro; the statutory reserves may only be used to offset falls in value and to cover other losses; (b) the balance are paid over to Germany. 3. Accounting
Article 26 (2) The accounting system of the Bank shall comply with generally accepted accounting principles. E. 1. (Japan) Bank of Japan Law Capital
Article 8 The amount of the capital is 100 million yen to be subscribed with the government subscription not less than 55 million yen. 2. Profits
Article 53 The Bank shall retain, as a reserve fund, 5% or more upon the authorization of the Minster of Finance, of the surplus. The Bank may pay dividends to shareholders out of the surplus. The Bank, after deducting the retained reserves and the dividend payments shall transfer the remaining surplus to the national treasury. 3. Accounting
Article 51
288
The Bank shall prepare a budget for general and administrative expenses and submit it to the Minister of Finance. F. 1. Bank of Korea Act Capital
Article 2 The Bank of Korea shall be a special legal person without capital. 2. Profits
Article 99 BOK shall accumulate 10/100 of net profits. Article 100 Losses of the Bank shall be compensated from reserves and by the government. 3. Accounting
Article 98 BOK shall obtain approval in advance from the Minister of Finance and Economy on a budget on expenses. G. 1. (Poland) Act on the National Bank of Poland Capital
Article 61 The registered equity of the NBP shall amount to 400 million zloty. 2. Profits
Article 62 Appropriations to reserve capital shall represent 2% of annual net profit. 3. Accounting
Article 67 The NBP accounting principles must conform to international accounting standards. H. (Taipei, China) Central Bank of China
from Articles 4 and 40-43 The Banks capital is appropriated from the Treasury and is not transferable outside the central government. One half of any surplus or profit is to be set aside each
year as retained earnings until those accumulated earnings equal the Banks statutory capital. Thereafter, subject to Board resolution and concurrence by the Board of Supervisors, that retention ratio may be lowered, with a floor rate of 20% of profits. Changes in the value of the Banks reserve assets or its liabilities are to be accounted for as translation, not transaction events and are to be balanced in the Exchange Reserve Account, rather that the profit and loss accounts. All fiscal reports of the Bank are to be examined and approved by the Board and to be audited and approved by the Board of Supervisors and processed according to the Fiscal Reporting Law. I. 1. (UK) Bank of England Act Profits
Section 1 (4) of the Bank of England Act 1946 No dividends on Bank stock shall be declared but in lieu of any such dividends the Bank shall pay to the Treasury a sum equal to 25% per cent of the Banks net profits, or such other sum as the Treasury and the Bank may agree. 2. Accounting
Section 7 The Bank shall keep proper accounts and records in relation to the accounts. J. 1. (USA) Federal Reserve Act Capital
Section 243 The Board shall have power to levy semi-annually upon the Federal reserve banks. Section 281 No Federal reserve bank shall commence business with a subscribed capital less than US$ 4 million. 2. Profits
Section 289 After all necessary expenses, the stockholders of the Federal reserve bank shall be entitled to receive an annual dividend of 6% on paid-in capital stock. Section 290
290
The net earnings from Federal reserve banks shall, in the discretion of the Secretary of the Treasury, be used to supplement the gold reserve or to the reduction of the outstanding bonded indebtedness of the US.
291

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Banking Laws and Regulations

ASIAN DEVELOPMENT BANK FUNDED TECHNICAL ASSISTANCE: PRC 3890

INTERNATIONAL LAW INSITUTE

PRC 3890 BANKING LAWS AND REGULATIONS

with contributions from

INTERNATIONAL LAW INSTITUTE

PRC 3890 BANKING LAWS AND REGULATIONS

Executive Summary ............................................................................................................ 1

INTERNATIONAL LAW INSTITUTE

PRC 3890 BANKING LAWS AND REGULATIONS

III. WTO COMMITMENTS AND COMPLIANCE ISSUES ............................................................ 72

INTERNATIONAL LAW INSTITUTE

PRC 3890 BANKING LAWS AND REGULATIONS

IV. CREDIT INFORMATION BUREAU REGULATION.............................................................. 103

INTERNATIONAL LAW INSTITUTE

PRC 3890 BANKING LAWS AND REGULATIONS

VI. ANTI-MONEY LAUNDERING SUPPLEMENTARY GUIDE ON LAW DRAFTING .... 140

VII. FINANCIAL CONGLOMERATES............................................................................................. 160

INTERNATIONAL LAW INSTITUTE

PRC 3890 BANKING LAWS AND REGULATIONS

VIII. BANK INSOLVENCIES ............................................................................................................... 195

IX. CONCLUSION............................................................................................................................... 224

INTERNATIONAL LAW INSTITUTE

PRC 3890 BANKING LAWS AND REGULATIONS

B. WTO Commitments tables of international comparisons ............................................................. 54

C. Credit Information Bureaus table of international comparisons ................................................. 62

PRC 3890 BANKING LAWS AND REGULATIONS

(international standards, key elements of law, international country comparisons)

93 103 122 173 193 194 201 202

G. Bank Insolvency supporting discussion and comparisons .......................................................... 207

H. Bank Insolvency tables of international comparisons ................................................................. 227

I. II. III. IV. V. VI. VII. VIII. IX

235 237 245 249 266 273 276 283 285

INTERNATIONAL LAW INSTITUTE

PRC 3890 BANKING LAWS AND REGULATIONS

Finance and accounting

INTERNATIONAL LAW INSTITUTE

PRC 3890 BANKING LAWS AND REGULATIONS

INTERNATIONAL LAW INSTITUTE

FINAL REPORT, SECTION I EXECUTIVE SUMMARY

PRC 3890 BANKING LAWS AND REGULATIONS

FINAL REPORT, SECTION I EXECUTIVE SUMMARY

PRC 3890 BANKING LAWS AND REGULATIONS

FINAL REPORT, SECTION I EXECUTIVE SUMMARY

PRC 3890 BANKING LAWS AND REGULATIONS

FINAL REPORT, SECTION I EXECUTIVE SUMMARY

PRC 3890 BANKING LAWS AND REGULATIONS

INTERNATIONAL LAW INSTITUTE

FINAL REPORT, SECTION I EXECUTIVE SUMMARY

PRC 3890 BANKING LAWS AND REGULATIONS

INTERNATIONAL LAW INSTITUTE

FINAL REPORT, SECTION I EXECUTIVE SUMMARY

PRC 3890 BANKING LAWS AND REGULATIONS

CHART OF ACTIVITY COVERED WITHIN THE LEGAL FRAMEWORK

PROPOSED COVERAGE BY LAW

Authorizes JFSC + Monitoring Coordination; LOLR operations Secondary focus JFSC

Primary focus Data collection Data collection Authorize AML unit

INTERNATIONAL LAW INSTITUTE

FINAL REPORT, SECTION I EXECUTIVE SUMMARY

PRC 3890 BANKING LAWS AND REGULATIONS

OLD, PROPOSED AND NEW PRC BANKING LAWS

1995 PBC Law

PBC Law Proposals

New PBC Law