China Unveils Major Revamp to Commercial Bank Law
What’s new: China’s central bank issued draft revisions Friday to its commercial bank law enacted 25 years ago, expanding application of the law and improving mechanisms of market exit for lenders.
The revisions clarify that policy banks, rural credit cooperative banks, financial companies that handle commercial banking business and foreign commercial banks and their branches are all under the application of the law, reflecting financial openness and fair market competition.
The revisions also set out a mechanism for risk rating and mitigating, laying out steps for banks from risk alerting, early correction, restructurings and takeovers to bankruptcies, with a process similar to the government takeover of Baoshang Bank last May.
The background: The current commercial bank law enacted in 1995 has been revised twice, in 2003 and 2015. Many provisions have not been adapted to actual needs.
Recent bailouts of lower-tier banks, including Baoshang Bank, Bank of Jinzhou and Hengfeng Bank, highlight the defects of corporate governance in commercial banks, especially small and medium-sized banks, and problems involving major shareholders.
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