In Depth: China’s Sweeping Banking Law Rewrite Targets Hidden Risks

1. China is planning the most significant overhaul of its banking law in over 20 years, targeting its vast 480 trillion yuan ($69 trillion) banking system. The reform aims to allow regulators to better control rising risks within the sector, affecting not just banks but the entire banking ecosystem, including secretive shareholders, employees, and auditors. A comprehensive draft amendment to the Banking Supervision and Administration Law was released on December 27, 2023, for public comment, signaling major changes in Beijing’s approach from reactive clean-ups to preemptive, cradle-to-grave supervision in the world’s second-largest economy. [para. 1][para. 2][para. 3]

2. The need for a new law arises from the inadequacy of the 2004 law in keeping pace with the banking sector’s explosive growth and complexity. New challenges such as covert equity structures, concealed cross-holdings, and novel digital business models have created regulatory blind spots, leading to festering risks. [para. 4]

3. The reform includes widening the regulatory scope to cover the ultimate controllers of banks—often shadowy owners who have been implicated in scandals where banks were misused as personal piggy banks. Regulators would have the authority to scrutinize the financial integrity and backgrounds of such controllers and major shareholders before a bank is established or when any change of control occurs. Shareholders will be required by law to fully disclose their ownership structures and connections. [para. 5][para. 6]

4. If a shareholder or controller abuses their power and damages the bank or its customers, the National Financial Regulatory Administration (NFRA) would be empowered to intervene, ordering corrections, restricting or suspending business, halting expansion, or preventing further investments if violations are not rectified. [para. 7]

5. The law would also introduce strict oversight of third-party firms such as accounting, legal, asset appraisal, and IT service providers that work for banks. These firms, which have occasionally enabled banking misconduct, would be held to regulatory standards, with penalties for producing false records, misleading statements, or for data mismanagement—including significant fines and confiscation of illegal gains. [para. 8][para. 9]

6. Recognizing the importance of individuals in institutional governance, the draft law would set clear prohibitions for bank employees, including bans on self-dealing, poor due diligence, regulatory evasion, false advertising, illegal fees, and customer data mishandling. The emphasis reflects findings that over 58% of 3,594 convicted financial crimes by banking employees between 2015 and 2022 in China were related to illegal fundraising, fraud, and lending. [para. 10][para. 11][para. 12]

7. A new, structured framework for responding to troubled banks is another key element. Regulators would have a tiered system of intervention, moving from early warning and rectification to potential restructuring, takeover, license revocation, or bankruptcy. Tools for restructuring would include mergers, capital injections, and asset/liability transfers, and takeover groups could act decisively to stabilize or wind down troubled banks. This stands in contrast to past approaches, like the 2019 government-led Baoshang Bank bailout versus the more market-based 2020 Sichuan Bank restructuring. [para. 13][para. 14][para. 15][para. 16]

8. The proposed law would toughen financial penalties for violations, increasing fine ceilings, expanding who can be held liable, and applying “dual punishment” to both institutions and responsible individuals. Shareholders and controllers face fines up to 10 times their illicit gains or 10 million yuan, and may be forced to return illegally gained dividends—an innovative approach to enforcement. [para. 17][para. 18]