Regulator Zeroes in on Banks’ Shareholding Flaws

China’s banking regulator has stepped up scrutiny of the ownership of commercial banks, part of a larger effort to rein in financial market misconduct and risks.

The China Banking Regulatory Commission (CBRC) has drafted two sets of guidelines explaining the supervisory measures for bank shareholders and regulation of banks’ reporting on ownership changes, according to Liu Fushou, director of CBRC's regulation department. The guidelines will be issued soon, said Liu.

The guidelines flesh out detailed implementation measures for the CBRC’s new bank ownership rules, published in January, which specified requirements of bank shareholders and introduced tougher punishments for violators.

Liu said at a Friday press briefing that the commission will conduct spot checks of commercial banks’ shareholding structures this year and strictly punish those violating the rules.

According to the new guidelines, banks’ existing shareholders who fail to meet the requirements set by the January rules should submit an application to the CBRC to review their existing holdings. If the commission finds flaws in their investments, they would be expected to make adjustments based on the new rules.

Those who fail to report to the regulator or fix irregularities will face punishment, according to the guidelines.

The January rules require major shareholding entities of commercial banks to explain their reason for investing in a bank and to disclose their ownership structures and the identities of their actual controllers.

The rules define a major shareholder as an investor who holds a stake of more than 5% in a bank and/or has a significant influence on business operations.

The January document also stipulates that any investor, along with its related parties, can hold more than a 5% stake or major voting power in no more than two commercial banks. An investor can own a controlling stake in only one bank. Such requirements have existed in previous industry rules but were loosely enforced.

The new guidelines also set specific requirements on how banks should report major transactions and investments made by its shareholders, according to a CBRC official.

The moves reflect regulators’ determination to crack down on speculators who try to obtain control of banks illegally through proxy shareholders or who conduct illicit connected-party transactions.

In December, the CBRC imposed 15.6 million yuan ($2.4 million) in fines on Hengfeng Bank, a national commercial lender whose top executives sought to use proxy companies to mask their control of the bank through complex shareholding structures. A CBRC official depicted this case as typical of a bank with flaws in its corporate governance.

Contact reporter Han Wei (weihan@caixin.com)