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

Besides the PBOC, the China Banking and Insurance Regulatory Commission (CBIRC), the State Administration of Foreign Exchange (SAFE) and the Ministry of Finance (MOF) are taking important roles in banking supervision in the PRC.

The PBOC is the PRC’s central bank, and its primary responsibilities include formulating and implementing monetary policies, and maintaining the stability of the banking industry. As the main agency for regulating and supervising banking institutions in the PRC and their conduct in the market, the CBIRC protects the legitimate rights and interests of stakeholders, including depositors. The SAFE is responsible for the administration of the country’s foreign exchange reserves and cross-border funds flow, and for monitoring the balance of payments and external credit and debt. The main duties of the MOF include drafting regulations on fiscal, financial and accounting management and overseeing the implementation of them, as well as developing treasury management and centralised treasury payment systems.

The principal laws and regulations governing the PRC’s banking sector include the following, amongst others:

• the Law of the PRC on the People's Bank of China (2003 Amendment);
• the Law of the PRC on Commercial Banks (2015 Amendment) (the "Law on Commercial Banks");
• the Company Law of the PRC (2018 Amendment);
• the Banking Supervision Law of the PRC (2006 Amendment) (the "Banking Supervision Law");
• the Anti-Money Laundering Law of the PRC (the "Anti-Money Laundering Law");
• Measures for the Supervision and Administration of Combating Money Laundering and Financing of Terrorism by Financial Institution;
• the Regulation of the PRC on the Administration of Foreign-Funded Banks (2019 Amendment) (the "Regulation on the Administration of Foreign-Funded Banks"); and
• the Regulation of the PRC on Foreign Exchange Administration.

In order to conduct banking services in the PRC, a PRC-based commercial bank should apply for a financial licence from the CBIRC and a business licence from the department of industry and commerce administration.

Activities and Services Covered

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

• absorbing public deposits;
• offering loans in various terms;
• arranging the settlement of both domestic and overseas accounts;
• handling the acceptance and discount of negotiable instruments;
• issuing financial bonds;
• issuing, cashing and undertaking the sale of government bonds as agents;
• buying and selling government bonds or financial bonds;
• undertaking inter-bank borrowing or lending;
• buying and selling foreign exchange by itself or as agents;
• engaging in bank card business;
• offering letter of credit services and guarantees;
• handling receipts and payments, and insurance business as agents;
• providing safe box services and other business as approved by the banking regulatory organ of the State Council; and
• operating foreign exchange sale or settlement business upon receiving approval from the PBOC.

Conditions for Authorisation

Pursuant to the Law on Commercial Banks, the requirements for establishing a commercial bank include:

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

According to the Regulation on the Administration of Foreign-Funded Banks, the minimum amount of paid-in registered capital of a wholly foreign-funded bank or a Sino-foreign equity joint venture bank shall be CNY1 billion, or its equivalent in freely convertible currency. The head office of a wholly foreign-funded bank or a Sino-foreign equity joint venture bank shall provide working capital to branches formed within the PRC, the sum of which shall not exceed 60% of the total capital of the head office. The head office of a foreign bank shall provide working capital of no less than CNY200 million, or its equivalent in freely convertible currency, to its branch, free of charge.

The Process for Applying

According to the Law on Commercial Banks, the following materials shall first be submitted to the CBIRC:

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

Once these materials are submitted, the applicant shall fill in a formal application, attaching the following documents and materials:

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

Timelines and Costs for Authorisation

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

For foreign applicants, according to the Regulation on the Administration of Foreign-Funded Banks, the CBIRC shall make a decision on approval within two months of receiving the complete application materials, and shall notify the applicant in writing. Once approved, the CBIRC or its local offices shall issue a financial licence.

Pursuant to the Chinese laws and regulations in effect, there is currently no cost for applying for a financial licence.

According to the Law on Commercial Banks, any change in the shareholders who hold more than 5% of the total amount of capital or shares of a commercial bank shall be subject to the approval of the CBIRC.

The Interim Measures for the Equity Management of Commercial Banks issued in 2018 (the "Measures") impose implementation rules on the management of commercial bank equity, setting different regulatory conditions according to the different shareholding ratios of the commercial banks’ shareholders. The Measures have tightened the CBIRC's regulation of information disclosure and reporting requirements by requiring major shareholders holding 5% or more of the shares or voting rights of a commercial bank, or holding less than 5% of the total capital or total shares while having a significant impact on the operation and management of the commercial bank, to disclose certain information.

Chinese-Funded Banks

According to the Implementation Measures for the Administrative Licensing Items concerning Chinese-Funded Commercial Banks (2022 Amendment), a change of equity for different kinds of Chinese-funded commercial banks must meet the following requirements.

State-owned commercial bank, the Postal Savings Bank or a joint-stock commercial bank

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

Shareholders holding more than 1% but less than 5% of the total capital or shares shall report to the CBIRC within ten days after the equity transfer.

Urban commercial banks

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

Shareholders holding more than 1% but less than 5% of the total capital or shares shall report to the local provincial CBIRC branch within ten days after the equity transfer.

Rural commercial banks

According to the Implementation Measures for the Administrative Licensing Matters of Rural Small and Medium-sized Banking Institutions (2022 Amendment) (the "Implementation Measures"), the transferee of equity in a rural banking institution shall meet the conditions of founder-members as set forth in the Implementation Measures.

In addition, changes of shareholders holding more than 1% but less than 5% of the total capital shall be reported by the banking institution to the local municipal or provincial CBIRC branch. An application for a change of shareholders holding more than 5% but less than 10% of the total capital shall be accepted, reviewed and decided by the local municipal or provincial CBIRC branch. An application for a change of shareholders holding more than 10% of the total capital shall be accepted by the local municipal CBIRC branch, reviewed and decided by the local provincial CBIRC branch, and reported to the CBIRC after the fact.

Foreign-Funded Banks

According to the Regulation on the Administration of Foreign-Funded Banks, a foreign-funded bank changing its shareholders or adjusting the shareholding proportion of its shareholders is subject to approval by the CBIRC, and shall submit application materials as required and go through the relevant registration procedures with the administration for market regulation.

According to the Notice by the CBIRC Regarding Issuing the Corporate Governance Standards for Banking or Insurance Institutions launched in 2021, banking institutions shall continue to raise the level of corporate governance to gradually reach the standards of good corporate governance, including the following:

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

In accordance with the Company Law of the PRC, a banking institution shall establish a corporate governance structure consisting of:

• the shareholders' meeting;
• the board of directors;
• independent directors;
• special committees of the board of directors such as audit, compensation or risk management committees;
• the board of supervisors;
• senior management; and
• other governance bodies.

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

A banking institution shall produce articles of associates and procedural rules for the shareholders' meeting, the board of directors' meeting and the board of supervisors' meeting, as well as its risk tolerance, risk management and internal control policies.

Chinese-Funded Banks

Persons required to go through the licensing process

Pursuant to the Implementation Measures of the CBIRC for the Administrative Licensing Items concerning Chinese-Funded Commercial Banks (2022 Amendment), the chairman or vice chairman of the board, independent directors, other members of the board or the secretary to the board of a Chinese-funded commercial bank shall go through the licensing for its office qualification with the CBIRC or its local branches.

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

The chairman or vice chairman of the board, the president (or the general manager) or vice president (or the vice general manager) or the chief representative of an overseas branch of a Chinese-funded commercial bank hired from within the PRC shall go through the licensing for its office qualification with the CBIRC or its local branches.

Conditions

To apply for qualification as a director or senior executive of a Chinese-funded commercial bank, the proposed person must perform the duties of loyalty and diligence to the financial institution, and have the following:

• full capacity for civil conduct;
• a good record of compliance with laws and regulations;
• good character and reputation;
• the relevant knowledge, experience and capability necessary for holding the office;
• a good practising record in the economic or financial field;
• sound personal and family finances; and
• the necessary independence for holding the office.

To apply for the qualifications of a director of a Chinese-funded commercial bank, the applicant must also:

• have more than five years of legal, economic, financial, accounting or other work experience conducive to the performance of directors’ duties;
• be able to use the financial statements and statistical reports of a financial institution to judge its management and risk status;
• understand the corporate governance structure, the articles of association and duties of the board of directors of the proposed institution; and
• be an expert in law, economics, finance or accounting and comply with the relevant laws and regulations if they are to apply for the qualification of independent director of a Chinese-funded commercial bank.

Process for licensing

An application for qualification as a director or senior executive of a state-owned commercial bank, the Postal Savings Bank or a joint-stock commercial bank, and for qualification as a chairman or vice chairman of the board, the president (or general manager) or vice president (or vice general manager) of an overseas branch of said bank hired from within the PRC, shall be submitted to the CBIRC by the banking institution, which will be accepted, reviewed and decided within 30 days from the date of acceptance by the CBIRC.

The application for the qualifications of directors and senior executive of an urban commercial bank institution, its branches or its branch-level franchised institutions, as well as the qualification as a chairman or vice chairman of the board, the president (or general manager) or vice president (or vice general manager) of an overseas branch of said bank hired from within the PRC, shall be submitted by the banking institutions to the local municipal or provincial branch of the CBIRC for preliminary review. The provincial branch of the CBIRC will make a written decision of approval or disapproval within 30 days from the date of acceptance.

If the proposed person has previously served as the chairman of the board of directors or a senior manager of a financial institution, an audit report on the performance of duties by said person shall also be submitted.

Foreign-Funded Banks

General requirements

A director, senior executive or chief representative of a foreign-funded bank shall not take office before their office qualification is confirmed by the CBIRC or its local office.

Conditions

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

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

Process

After a foreign-funded bank submits the application materials for confirmation of satisfaction of office qualifications, the CBIRC or its local office may hold an interview with the proposed person before they take office.

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

Accountability Requirements

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

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

A senior management officer of a banking institution shall comply with laws, regulations, regulatory provisions and the banking institution’s articles of association, engage in proper professional conduct, abide by high standards of professional ethics, meet obligations of loyalty and diligence to the company, perform duties in good faith, dutifully and prudentially, guarantee that they have sufficient time and energy to perform duties, and not be slack in performing duties nor perform duties beyond their authority.

Banking Institutions' Remuneration Requirements

The Notice of CBIRC on Issuing the Supervisory Guidelines on Sound Compensation in Commercial Banks (2010) applies to employees of commercial banks, and the Notice by the CBIRC on Issuing the Guiding Opinions on Establishing and Improving the Mechanism of Banking and Insurance Institutions for the Recourse and Deduction of Performance-Based Compensation (2021) mainly applies to personnel who receive performance-based compensation from banking institutions, including directors, supervisors, senior executives and personnel holding key positions in the banking institution.

A commercial bank shall design a uniform compensation management system, which shall be composed of:

• fixed compensation, which is the basic compensation;
• variable compensation, which includes performance-based compensation and various mid- and long-term incentives; and
• fringe benefits, which include insurance premiums and a housing accumulation fund.

Compensation mechanism

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

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

Compensation management system

The compensation management system shall include:

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

Performance-based compensation

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

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

The Regulator's Supervisory Regime

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

Consequences of Breaching the Requirements

According to the Notice of CBIRC on Issuing the Supervisory Guidelines on Sound Compensation in Commercial Banks (2010), if the compensation management system and the performance assessment indicators of a commercial bank do not meet the relevant provisions, the CBIRC has the power to order it to make a correction under relevant provisions of the PRC Banking Supervision Law, and to investigate and deal with any failure to:

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

The main AML laws and regulations applicable to the banking sector are:

• the Anti-Money Laundering Law of the PRC;
• the Measures for the Supervision and Administration of Combatting Money Laundering and Financing of Terrorism by Financial Institutions;
• the Measures for Administration of Combatting Money Laundering and Financing of Terrorism by Banking Financial Institutions; and
• the Notice by the PBOC and the SAFE of Issuing the Guidelines on the Anti-Money Laundering and Anti-Terrorist Financing Work of Banks for Cross-Border Business (for Trial Implementation).

The main requirements include that financial institutions, including commercial banks, shall:

• establish and improve an internal control system for combatting money laundering and the financing of terrorism;
• assess the risks of money laundering and the financing of terrorism;
• establish a risk management mechanism commensurate with the risk status and business scale;
• build an information system for combatting money laundering; and
• establish or designate a department and appoint corresponding personnel to effectively perform the obligations of combatting money laundering and the financing of terrorism.

Banking institutions set up within the PRC shall adopt relevant measures for prevention and supervision according to the law and establish:

• a clients’ identity identification system;
• a system for the preservation of clients’ identity materials and transaction records; and
• a reporting system for large sum and doubtful transactions.

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

Where a financial institution violates the relevant AML and CFT provisions, the PBOC or its branch offices would recommend that the CBIRC makes the following orders:

• that the financial institution must correct the violation within a set time limit; or
• under serious circumstances, that the financial institution must give a disciplinary sanction to its directly liable directors, senior executives or any other person, or impose a fine of between CNY200,000 and CNY500,000 on the financial institution and a fine of between CNY10,000 and CNY50,000 on its directly liable directors, senior executives or any other person.

The Law on Commercial Banks includes a chapter on the protection of depositors.

Principles

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

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

Protection Regime

A commercial bank shall determine its own interest rates in accordance with the upper and lower limits for deposit interests set by the PBOC, and make an announcement.

A commercial bank shall pay a certain amount of deposit reserve fund to the PBOC and keep adequate payment funds in accordance with the provisions of the PBOC.

A commercial bank shall guarantee the payment of principal and interest on the deposits, and shall not delay or refuse to pay the principal or interest on the deposits.

Deposit Insurance System

The Deposit Insurance Regulation implemented in May 2015 stipulates that the deposit insurance fund formed by insurance premiums shall be managed and used by the Deposit Insurance Fund Management Co. Ltd., established by the PBOC.

Deposit-absorbing financial institutions formed within the PRC are institutional policyholders that pay insurance premiums to the Deposit Insurance Fund Management Co. Ltd. The insurance premium payable by an institutional policyholder shall be calculated on the basis of the insured deposits of the institutional policyholder and the applicable insurance rates determined by the Deposit Insurance Fund Management Co. Ltd.

Under any of the following circumstances, a depositor has the right to request the Deposit Insurance Fund Management Co. Ltd. to use the deposit insurance fund to pay its insured deposits, up to the limit of CNY500,000:

• the Deposit Insurance Fund Management Co. Ltd. serves as the organisation to take over the institutional policyholder;
• the Deposit Insurance Fund Management Co. Ltd. conducts the liquidation of the cancelled institutional policyholder;
• a PRC court decides on and accepts the bankruptcy application of the institutional policyholder; and
• other circumstances approved by the State Council.

If the amount of principal and interest on deposits in all insured deposit accounts owned by the same depositor at the same institutional policyholder is less than CNY500,000, the deposits shall be paid in full. The portion in excess of CNY500,000 shall be paid with the liquidated property of the institutional policyholder.

Upon paying the insured deposits of a depositor, the Deposit Insurance Fund Management Co. Ltd. acquires the depositor's claim against the institutional policyholder in the same order of liquidation.

Main Requirements

According to the Law on Commercial Banks, in handling individual savings deposits, commercial banks shall maintain confidentiality for depositors. No employee of a commercial bank may divulge any state or commercial secret they acquire during their term of service.

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

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

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

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

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

Principal Exceptions

According to the Personal Information Protection Law of the PRC, personal information processors, including banking institutions, may process personal information without obtaining personal consent under the following circumstances:

• if the processing is necessary for the conclusion or performance of a contract to which the individual is a contracting party or for conducting human resource management under the labour rules and regulations developed in accordance with the law and a collective contract signed in accordance with the law;
• if the processing is necessary to fulfil statutory functions or statutory obligations;
• if the processing is necessary to respond to public health emergencies or to protect the life, health or property safety of natural persons under emergency circumstances;
• if personal information is processed within a reasonable scope to conduct news reporting, public opinion-based supervision, or other activities in the public interest; or
• if the personal information that has been disclosed by the individuals themselves or other personal information that has been legally disclosed is processed within a reasonable scope in accordance with this law.

Where laws provide for the processing of personal information in the process of statistical or archive administration activities organised and implemented by the people's governments at various levels and relevant departments thereof, such provisions shall prevail.

Consequences of Breach

According to the Law on Commercial Banks, any employee of a commercial bank divulging state or commercial secrets acquired during service shall be subject to a disciplinary punishment or to criminal liabilities if the act is so serious as to constitute a crime.

According to Article 55 of the Implementation Measures of the PBOC for Protecting Financial Consumers' Rights and Interests, where a bank or payment institution infringes upon financial consumers' lawful rights and interests, such as divulging, damaging or tampering with financial consumers’ personal information, the PBOC or its branch office may take the following measures:

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

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

Quantity and Quality of Capital Requirements

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

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

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

A commercial bank shall hold a capital reservation buffer in addition to the minimum capital requirements, which shall amount to 2.5% of the bank’s risk-weighted assets and be fulfilled by Core Tier 1 capital.

Under specified circumstances, a commercial bank shall hold countercyclical capital in addition to the minimum capital requirement and the capital reservation buffer requirement. Countercyclical capital shall amount to 0–2.5% of the bank’s risk-weighted assets and be fulfilled by Core Tier 1 capital.

In September 2022, the PBOC and the CBIRC released the updated list of China’s SIBs for 2022. According to the Provisions on the Additional Regulation of SIBs (for Trial Implementation), SIBs classified in the first to fifth group are subject to additional capital requirements of 0.25%, 0.5%, 0.75%, 1% and 1.5%, respectively. If a bank is identified as both a China SIB and a global SIB, the additional capital requirement is determined on the principle of the higher of the two. The additional capital requirement shall be fulfilled by Core Tier 1 capital.

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

Liquidity Requirements

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

A commercial bank with an asset size of not less than CNY200 billion shall continuously meet the minimum supervisory standards for LCR, NSFR, liquidity ratio and liquidity matching ratio. A commercial bank with an asset size of less than CNY200 billion shall continuously meet the minimum supervisory standards for adequacy ratio of HQLA, liquidity ratio and liquidity matching ratio. Upon approval by the CBIRC, it must only meet the requirements of LCR and NSFR.

LCR is designed to ensure that a commercial bank has adequate qualifying HQLA that can be monetised to meet the future liquidity needs of, at a minimum, 30 days under the liquidity stress scenarios as prescribed. The minimum supervisory standard of LCR is no lower than 100%.

NSFR is designed to ensure that a commercial bank has adequate sources of stable funds to meet the needs of various types of assets and off-balance-sheet risk exposure for stable funds. The minimum supervisory standard of NSFR is no lower than 100%.

Liquidity matching ratio, which measures the maturity allocation structure of the major assets and liabilities of commercial banks, is designed to direct commercial banks to rationally allocate long-term stable liabilities and high-liquidity or short-term assets, avoid over-reliance on short-term funds in supporting the development of long-term business, and improve their capacity to withstand liquidity risk. The minimum supervisory standard of liquidity matching ratio is no lower than 100%.

Adequacy ratio of HQLA is designed to ensure that a commercial bank maintains adequate unencumbered HQLA that can be monetised to meet the future liquidity needs within the coming 30 days in times of stress. The minimum supervisory standard of the adequacy ratio of HQLA is no lower than 100%.

The liquidity ratio of a bank shall not be lower than 25%.

Risk Management Rules

Risk management rules on quantity and quality of capital requirements

According to the Administrative Measures for the Capital of Commercial Banks (for Trial Implementation), commercial banks shall meet the following requirements:

• having a sound risk management framework and a robust internal capital adequacy assessment process;
• specifying the risk governance structure;
• prudentially assessing various risks, capital adequacy levels and capital quality; and
• developing capital plans and capital adequacy ratio management plans to ensure that their capital is sufficient to resist risks facing them and meet the needs of business development.

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

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

The information disclosure of the capital adequacy ratio shall cover at least the following:

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

Risk management rules on liquidity requirements

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

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

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

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

• the liquidity risk management governance structure, including the duties and roles of the board of directors and its specialised committees, the senior management and the relevant departments;
• the liquidity risk management strategies and policies;
• the main methods for the identification, measurement, monitoring and control of liquidity risk;
• the main liquidity risk management indicators and a brief analysis thereof;
• the major factors affecting liquidity risk; and
• information on stress testing.

Additional Requirements Applicable to SIBs

As well as the additional capital requirement, the Provisions on the Additional Regulation of SIBs (for Trial Implementation) imposes further regulatory requirements on China’s SIBs.

A SIB shall satisfy additional leverage ratio requirements in addition to the general leverage ratio requirements. The additional leverage ratio requirement is 50% of the additional capital requirement for SIBs, which shall be met by Tier 1 capital.

The PBOC strengthens the monitoring, analysis and risk assessment of SIBs on the basis of consolidation, including:

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

The CBIRC implements consolidated supervision and administration, and imposes strengthened supervision requirements on SIBs in accordance with the law.

The Principal Means of Resolving a Failing Bank

According to the Law on Commercial Banks, where a commercial bank is unable to pay the debts due, it may be adjudicated bankrupt by a PRC court according to law, with the consent of the CBIRC. In this process, the court shall co-ordinate with the CBIRC and other relevant departments and personnel to form a liquidation group. In the bankruptcy liquidation of a commercial bank, after paying the liquidation expenses, salaries and labour insurance fees of its employees, the bank shall prioritise paying the principal and interest on individual savings deposits.

The Financial Stability Board Key Attributes of Effective Resolution Regimes

In June 2021, the CBIRC formulated the Notice of Issuing the Interim Measure for the Implementation of Recovery and Resolution Plans of Banking and Insurance Institution (the "Measures for the Implementation of RRP"), in response to the Financial Stability Board key attributes of effective resolution regimes, to systemically arrange the identification, supervision and resolution of systemically important financial institutions (SIFIs).

A banking institution that meets the following conditions shall make recovery and resolution plans as required by the Measures for the Implementation of RRP:

• a public deposit-absorbing financial institution whose (domestic and overseas) adjusted on- and off-balance-sheet assets (denominator of leverage ratio) on a consolidated basis at the end of last year reach CNY300 billion (including its equivalent in foreign currency) or more; and
• any other banking institution that does not meet the previous condition but is designated by the CBIRC or its local office to make recovery and resolution plans based on such factors as business characteristics, risk profile and spill-over effects.

The RRP made or updated by a banking institution shall be subject to approval by the board of directors, except as otherwise prescribed by the CBIRC. The board of directors shall assume ultimate responsibility for the formulation and update of the RRP, the senior management shall assume management responsibility, and shareholders shall assume shareholder’s responsibility in accordance with laws, regulations or the institution’s articles of associations.

The CBIRC and its local offices are responsible for regulating the formulation and implementation of RRP by banking institutions, and shall share the RRP of banking institutions with the PBOC, the Deposit Insurance Fund Management Co. Ltd., the China Security Regulatory Committee, the MOF and local governments, among other entities.

Where the regulatory requirements for the RRP of global or domestic SIFIs are otherwise provided for, such provisions shall prevail.

Insolvency Preference Rules Applicable to Deposits

As mentioned above, the insolvency preference rules applicable to deposits are stipulated in the Law on Commercial Banks, according to which the bankrupt commercial bank shall, after paying liquidation expenses, salaries and labour insurance fees, pay in priority the principals and interests of individual savings deposits.

Regulating Internet Financial Services

The CBIRC has recently issued the following, which have had a disruptive impact on internet finance:

• the Notice of Strengthening the Administration of the Internet Loan Business of Commercial Banks and Improving the Quality and Efficiency of Financial Services;
• the Interim Measures for the Administration of Internet Loans of Commercial Banks;
• the Notice of Further Regulating the Internet Loan Business of Commercial Banks; and
• the Notice of Further Regulating the Supervision and Administration of Online Consumer Loans for College Students.

The CBIRC has always adhered to the following principles for the rectification of online platforms’ financial business:

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

Focus will be put on supporting network platform enterprises in upholding innovation and standardising development under the premise of prudential supervision, and at the same time resolutely breaking up any monopoly.

The main purposes of these policies are to:

• raise the threshold for financial institutions and internet companies to carry out joint loan business co-operation;
• restrict financial institutions from conducting fixed deposit and time-demand deposit business through third-party internet platforms; and
• essentially cancel the sales of wealth management products by internet companies as agents.

These policies will completely change the business model of internet companies relying on the advantages of technology, high leverage and high returns.

Lifting Restrictions on Foreign Shareholdings in the Banking Sector

Since 2018, restrictions on foreign funds holding equity in the banking sector have been gradually abolished. According to the CBIRC, as of the end of May 2022, there were 41 foreign-funded banks, 116 branches of foreign banks and 134 representative offices in China. BlackRock CCB Wealth Management (a joint venture of BlackRock Financial Management and China Construction Bank subsidiary CCB Wealth Management) was approved by the CBIRC to launch pension products. The Hong Kong-established Dah Sing Bank was licensed to form its Shenzhen branch in addition to its PRC subsidiary, Dah Sing Bank (China) Limited, becoming the first foreign bank to be granted "double licences" by Chinese regulators. China is unprecedentedly willing to welcome foreign funds participating in its financial market.

Improving the Protection of Financial Consumer Rights

In September 2020, the PBOC issued the Implementation Measures for Protecting Financial Consumers' Rights and Interests. In July 2021, the CBIRC issued the Measures for the Supervision and Evaluation of the Protection of Consumer Rights and Interests of Banking Insurance Institutions. Such regulations require financial institutions to:

• establish rules on the protection of financial consumers' rights and interests;
• clarify relevant codes of conduct;
• improve internal control over personal financial information protection;
• implement a financial product and service information disclosure mechanism;
• assess financial consumers’ risk level;
• implement a complaint acceptance and handling process; and
• popularise financial knowledge and the education of financial consumers.

At the same time, with the enactment of the Personal Information Protection Law of the PRC, the responsibilities of financial institutions in terms of protecting personal financial information have become stricter. When collecting personal financial information, financial institutions shall follow the principles of lawfulness, reasonableness and necessity, strictly fulfilling the obligation to maintain information confidentiality and properly comply with laws, regulations and the scope authorised by the individual to process, store and use personal financial information.

Strengthening the Compliance Risk Management of Digital Financial Services

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

To boost the development of green finance and better assist in the endeavour to prevent and control pollution, the CBIRC recently released the Notice of Issuing the Guidelines on Green Finance for the Banking and Insurance Industries, under which banking institutions are required to increase support for the green, low-carbon and circular economies and prevent ESG risk. Banking institutions shall formulate ESG risk assessment standards for clients and conduct classified management and dynamic assessment of client risks, the result of which shall be used as an important basis for client rating, access to loans, and client management and withdrawal. Prior to the grant of loans to an investment project, a list of compliance documents and a compliance risk examination list with respect to ESG shall be prepared and reviewed by the bank to confirm clients are paying sufficient attention to – and having effective dynamic control over – the relevant risk points.

According to the Plan for the Green Finance Evaluation of Banking Financial Institutions issued by the PBOC in May 2021, the green finance evaluation of 24 major banks include quantitative and qualitative indicators, with a weight of 80% and 20%, respectively. The former covers the ratio of the total amount of green financial services, the share of the total amount of green financial services, the year-on-year growth rate of the total amount of green financial services and the ratio of total risk amount of the green financial services. The latter is determined by the PBOC in light of, among others, the daily management and risk control based on the qualitative indicator system.