Opening Speech by CBRC Chairman SHANG Fulin at the 18th International Conference of Banking Supervisors
September 24, 2014
Distinguished BCBS Chairman Mr. Stefan Ingves,
Distinguished Mayor of Tianjin Municipality Mr. HUANG Xingguo,
Ladies and Gentlemen,
As the Basel Committee celebrates its 40th anniversary this year, it gives me great pleasure to meet banking supervisors all over the world in this beautiful city, Tianjin, to share our experiences in banking supervision, discuss international regulatory reforms, and map out strategies for financial stability. Here, on behalf of the CBRC, I would like to extend our sincere welcome to all of you.
The welcoming speech delivered by Mayor HUANG Xingguo just now outlined the fascinating history, culture and vitality of Tianjin which also epitomizes the dynamism of China¡¯s economy and society. Taking this opportunity, I would like to brief you on the reform and development of the Chinese banking sector, and then offer my thinking on how to build an effective banking regulatory system in the face of the common challenges of the global banking industry. I hope my thoughts could help to initiate discussions during the conference.
I. Reform and Development of the Chinese Banking Sector
Thirty years ago, China¡¯s financial market was under-developed with no commercial banks in real sense. With the reform and opening up, China¡¯s economy and society has undergone profound changes. The banking sector also witnessed historic transformations during the 30-year period of fast economic growth. Over these years, focusing on building a modern banking system, China has launched a series of major reforms in a step-by-step manner that have separated the nation¡¯s finances and financial services, commercial banks and the central bank, and policy banks and commercial banks. A modern financial system has now taken shape with commercial banks as the major market players, policy banks and cooperative institutions as the necessary supplements, and various types of financial institutions coexist.
China has nearly 4,000 financial institutions nationwide, with a total banking
assets of RMB 160 trillion (or USD 26 trillion), accounting for more than 90%
of the country¡¯s total financial assets. The capital adequacy ratio (CAR) of the
commercial banks has reached 12.4%, NPL ratio stands at 1.08%£¬and provisioning coverage ratio 263%, reflecting the banking sector¡¯s good asset quality£¬strengthened
risk-absorbing capacity and controllable risks. According to the Top 1000 World Banks ranking for
commercial banks released at the end of this June by The Banker, the UK magazine, 110 Chinese banks are among the top 1000
world banks, and four are among the top
China pursues an independent policy of opening up. Especially since the accession to WTO in 2001, we have been honoring our commitments, practicing principles of national treatment, and steadily promoting the opening up in the banking industry. So far, foreign banks from 51 countries and regions have set up 43 locally-incorporated banks, 92 branches and 187 representative offices in China with a total asset of USD 437 billion and an annual growth rate of nearly 20%. In the meantime, Chinese banks have also expanded their overseas presence by having set up 1,127 operating institutions in 51 countries and regions abroad.
II. The Development of Banking Supervisory and Regulatory Practice in China
Since its inception in 2003, the CBRC has been exploring a banking regulatory system that both meets international standards and accommodates China¡¯s actual situation. After years of practice, we have gradually established an effective banking regulatory system that played an important role in confronting international financial crisis and promoting sound and sustainable growth of the banking industry. The Financial Sector Assessment Program (FSAP) jointly carried out by IMF and World Bank in 2009 and the Regulatory Consistency Assessment Program (RCAP) conducted by the Basel Committee in 2013 both fully affirmed and highly acknowledged China¡¯s banking regulatory system, capacity and effectiveness. Here, I would like to briefly talk about the banking supervision and regulation in China.
First, combining international standards and domestic practices. Since its establishment, the CBRC has drew on international supervisory experience and set up the supervisory philosophy of ¡°conducting consolidated supervision, ensuring the supervised institutions establish effective risk management and internal control systems, and enhancing transparency¡±. We strictly implemented international supervisory rules and standards such as capital, leverage, liquidity, etc. In many cases, we have introduced more prudential and stringent standards, including higher standards for Core Tier-1 Capital and leverage ratio, capital requirement applicable to all banking institutions, and stricter definition of high quality liquid asset. Given the Chinese banks that are largely reliant on credit business, we firmly implemented quantitative regulatory standards for liquidity and large exposures, adopted the on-going supervisory approach of ¡°ensuring accurate loan classification, sufficient loss provisioning, appropriate write-offs, acceptable profitability and adequate capital of the banking institutions¡±, and employed simple but effective regulatory standards such as loan-to-deposit ratio and provisioning coverage ratio. We have set up firewalls that separate banks, capital market and insurance market to prevent cross-sector risk contagion. All these measures have enriched the supervisory tool-kit that proves to be useful for the Chinese banking sector.
Second, combining macro- and micro-prudential supervision. We adhered to building a risk-based prudential supervisory system that combines macro- and micro-prudential supervisory measures. With nearly 700 laws and regulations issued and implemented, we have established a comprehensive supervisory system covering various types of banking institutions, businesses, banks¡¯ executives and corporate governance. Drawing upon the lessons from this round of international financial crisis, we have strengthened the dynamic supervision and raised standards for capital adequacy ratio and NPL ratio, timely enhanced counter-cyclical supervisory capacity, strengthened coordination between institutional supervision and macroeconomic policies, and promoted the building of an effective macro-prudential supervisory framework. We attached great importance to strengthening coordination among banking, security and insurance regulators, and set up supervisory colleges that facilitate cross-sector and cross-border supervisory cooperation. We actively implemented forward-looking risk prevention to detect and resolve various risks at an early stage, so as to safeguard the bottom-line that no regional or systemic risk should occur.
Third, combining institutional supervision and functional supervision. We continue to improve the supervisory governance system and mechanism, and have built a supervisory matrix integrating both institutional and functional supervision. In institutional supervision, we adopted the interdependent supervisory procedures encompassing licensing, off-site surveillance and on-site examination on banking institutions of different nature in the principle of ¡°full life-cycle coverage¡±. In functional supervision, we have set up specialized supervisory departments for financial innovation, IT systems, and consumer protection among other key areas in an effort to enhance the supervisory efficiency and specialization.
Fourth, combining both internal controls and market discipline mechanism. We place equal emphasis on banks¡¯ internal risk prevention and controls by self-discipline, and external market discipline. We focus on improving transparency, strengthening information disclosure and give full play to role of self-discipline in industry associations, so as to convert market discipline into the internal incentives for risk prevention among banks. We use both the ¡°visible hand¡± and the ¡°invisible hand¡± to enhance market efficiency, effectively prevent and reduce the risks in the banking system.
Fifth, combining risk-based supervision and service for the real economy. While strengthening supervision and risk prevention, we always focus on guiding the banking sector to serve the real economy, better support the key areas and weak links that are related to national development and people¡¯s livelihood, and make the banking industry more effective in serving the real economy. It is our mission to make sure that financial services keeps bolstering the real economy just as the water keeps nourishing a tall tree, guide the banking sector to regard the risk prevention as the bedrock for the sound development of industrial and commercial enterprises, and base the safety and soundness of the banking sector on the sustained and stable growth of the national economy, so as to fundamentally guard against and resolve financial risks.
III. Building an Effective International Banking Regulatory System
The Basel Committee, ever since its establishment, has played a significant role in introducing sound international banking regulatory standards, raising the resilience of the financial system, creating the level-playing field for the internationally active banks and maintaining global financial stability. Particularly, built upon the experiences and lessons learnt from national regulatory authorities in response to the recent financial crisis, the Basel Committee introduced a number of regulatory reforms including capital, leverage and liquidity standards, and placed more emphasis on the dynamic macro-prudential supervision and the effective implementation of international regulatory standards. As a member of the Basel Committee, China will work with other member jurisdictions to jointly push forward the international financial regulatory reforms and promote the establishment of an effective international banking regulatory regime. Here, I would like to make five propositions:
First, jointly promote the establishment of simple and transparent international regulatory standards. In recent years, the international banking regulatory standards, represented by the Basel Capital Accord, are becoming increasingly complex. This is largely driven by the increasing complexity of the banking system, increasing risk sensitivity and growingly stringent regulatory requirements. As the regulatory reforms deepen, there are debates about the growing complexity of those regulatory standards, especially the capital and liquidity, imposed higher compliance costs on banks while hampered the regulatory effectiveness. We know that the Basel Committee has realized the problems brought by complexity and started to address this issue. I hope we, as the banking supervisors and regulators, can gradually reduce the over-reliance on models and measurement techniques, and jointly establish and improve the simple, transparent and effective regulatory standards. For instance, we could use less complex calculation methods and parameters, reduce measurement model assumption conditions, use simple and comparable regulatory standards such as leverage ratio and loan-to-deposit ratio to simplify and clarify the regulatory standards.
Second, jointly promote the establishment of a fair international regulatory environment. In the wake of the recent international financial crisis, countries have introduced a series of structural regulatory reforms. Some of the reform measures, such as subsidiarization, business scale cap for foreign banks and limit on the funding flow back to the parent bank, aimed at protecting the domestic banking sector which were against international common practice, have undermined the level-playing field of the global banking industry. While some international standards and rules were designed based on business patterns and asset structures of advanced banks, which hardly fit into the unevenly-developed global banking picture. We should not lose the sight of the significant gap between developing and developed countries in terms of financial development stages and market depth. Hence, we must take full consideration into the differences of banking systems worldwide, and establish an inclusive international regulatory system for different asset structures, business complexity and risk characteristics, so as to create a level-playing field for global banking industry.
Third, jointly promote the coordination of banking regulatory policies and macroeconomic policies. On the global economic and financial stage, only when countries make concerted efforts can we perform a wonderful symphony of economic recovery. Facing the global financial crisis, we must tide over difficulties together to prevent negative spillover effects of macroeconomic policies. I hope that the Basel Committee can further play its role as the major channel in setting international banking regulatory standards, enhance the coordination among countries, and strengthen the synergy of different macroeconomic policies so that these policies can be more conducive to the soundness of the banking industry.
Fourth, jointly promote financial services to better serve the real economy. Financial industry is the core of the modern economy. As a major part of the financial industry, banking sector should always be rooted in the real economy, serve the economy and the society, and promote economic growth. Without real economy, enterprises or the general public, financial activities will lose their sources and foundations. China¡¯s fast economic growth in recent years offered us an opportunity to look further into and understand the close relationship between finance and economy, banks and enterprises, and savings and the public. As banking supervisors, we must guide the banking sector to better serve the real economy and the general public.
Fifth, jointly promote cross-border supervisory cooperation. As the world is becoming more integrated, financial risks are spreading more rapidly and extensively across borders, making no country immune to global financial risks. Though regulators around the world have implemented a number of reforms in crisis management and cross-border risk resolution, the problem of ¡°too-big-to-fail¡± for internationally active banks still exist. We need to improve the supervisory information exchange and sharing mechanism, and learn more experience in managing cross-border risks and resolving crisis. We need to promote cross-border cooperation in crisis management and risk resolution. We need to seek common responsibilities and strengthen cooperation instead of pursuing local interests, in order to prevent the recurrence of financial crisis at national, regional or international level, and build a long-term mechanism for global financial stability.
Ladies and gentlemen,
A far-away destination will be reached if we keep going forward; a difficult task will be accomplished if we keep doing it. Looking forward, we have every confidence in global banking regulatory reforms. As always, the CBRC will fulfill its responsibility as a member of the Basel Committee, strengthen communication and cooperation with regulatory authorities around the world, participate in global banking regulatory reforms, promote sound development of the banking industry, and help maintain the safety and soundness of the global financial system.
Finally, I would like to wish this conference a complete success, and wish all of you enjoy your stay in China!
Copyright: China Banking Regulatory Commission