Financial and Banking Supervision

2.1 Financial Supervision in the PRC

Financial supervision in the PRC operates under a fragmented financial regulatory structure (Figure 1 [ PDF 87.2KB | 1 page ]). While most countries that have implemented reforms in the past 25 years tended to move towards an integrated or twin teaks approach, PRC did not. Under the previous regulatory structure, all financial supervision was consolidated within the People's Bank of China (PBC), PRC's central bank. Through a series of reforms over the past 25 years, PRC has shifted to an institutional approach, where banking, securities, and insurance are supervised by separate agencies.

The PBC formulates and implements monetary policy, mitigates financial risks, and safeguards financial stability. Following the reform of the supervisory system and the creation of the China Banking Regulatory Commission (CBRC), the PBC no longer has a direct financial supervisory role. However, the Governor of the PBC is still a member of the State Council of China, which is the government's executive body. As such, it continues to have considerable influence over the general direction of financial supervision. The State Administration of Foreign Exchange (SAFE) is an agency within the PBC that manages PRC's foreign exchange reserves.

In 1992, the Securities Commission of the State Council and the China Securities Regulatory Commission (CSRC) were established to supervise the stock market jointly with the PBC. These two institutions merged in April 1998 and took the name CSRC. The CSRC is responsible for supervising and regulating the securities and futures markets. Other major CSRC functions include supervising securities and futures firms, stock and futures exchange markets, publicly listed companies, fund management companies, securities and futures investment consulting firms, and other intermediaries involved in the securities and futures business; protecting investors' rights and interests; and mitigating market risks.

In 1998, the State Council established the China Insurance Regulatory Commission (CIRC) as an agency to supervise, regulate, and ensure the sound development of the insurance industry. Major responsibilities of the CIRC include formulating insurance industry policies, strategies, and plans; drafting laws and regulations regarding insurance supervision and regulation; examining and approving the establishment of insurance companies; supervising insurance business operations; and investigating irregularities and imposing penalties as needed. In 2005, the China Insurance Protection Fund was established; this is now under the supervision and management of the Insurance Protection Fund Council.

In April 2003, the China Banking Regulatory Commission (CBRC) was established to supervise and regulate the banking sector. According to the Banking Supervision Law, the CBRC's responsibilities include supervising banks, financial asset management companies, trust and investment companies, and other depository financial institutions; approving new banking institutions; formulating prudential rules and regulations; and conducting a wide range of powers of examination, including off-site and on-site investigation. The CBRC is responsible for detecting risks in the banking sector and establishing an “early-warning system”.

The CBRC is led by a board consisting of a Chairman, a Discipline Commissioner, and a General Secretary. As of 2008, the CBRC staff numbered 23,345. Its institutions totaled 2,074, including departments affiliated to Banking Supervision Commission, supervisory board, financial labor union; 36 Banking Regulatory Commissions; 300 branches of the Banking Supervision Commission; and 1,735 supervisory agencies. Their budgets are authorized by the PRC State Council.

The CBRC's supervisory standards are mainly based on CAMELs+, with departments and their responsibilities working independently as follows:

• Supervisory Rules and Regulations Department(Research Bureau).The Supervisory Rules and Regulations Department is responsible for drafting regulations and provisions for the supervision of banking institutions. The department drafts laws and administrative regulations and makes proposals for drafts or amendments. It investigates important issues in the reform, development, and supervision of the banking industry. It is also responsible for proposing policies on the development of the banking industry.
• Banking Supervision Department I. The Banking Supervision Department I handles the day-to-day supervision of state-owned commercial banks.
• Banking Supervision Department II. The Banking Supervision Department II handles the day-to-day supervision of joint stock commercial banks and city commercial banks.
• Banking Supervision Department III (overseeing foreign-fund banks).The Banking Supervision Department III handles the day-to-day supervision of locally incorporated foreign bank subsidiaries.
• Banking Supervision Department IV (overseeing policy banks and postal savings institutions). The Banking Supervision Department III handles the day-to-day supervision of policy banks and postal savings institutions.
• Non-bank Financial Institutions Supervision Department. This department handles the day-to-day supervision of non-bank financial institutions, including financial asset management companies, trust companies, financial leasing companies, monetary brokers firms, and lending companies, but excluding securities, futures, and insurance institutions.
• Cooperative Finance Supervision Department (overseeing rural credit cooperatives and rural commercial banks). This department handles the day-to-day supervision of credit cooperative institutions, including rural commercial banks and rural credit cooperatives.

2.2 Financial Supervision in Hong Kong, China

The financial regulatory structure in Hong Kong, China is best described as having an institutional approach (Figure 2 [ PDF 90.5KB | 1 page ]). There are four principal regulators in Hong Kong, China: the Hong Kong Monetary Authority (HKMA); the Securities and Futures Commission (SFC); the Office of the Commissioner of Insurance (OCI); and the Mandatory Provident Fund Schemes Authority (MPFA). These institutions are responsible for regulating their respective industries of banking, securities and futures, insurance, and retirement schemes.

In 1992, as Hong Kong, China prepared for its transition into a Special Administrative Region of the PRC, the government began enacting measures to maintain the stability of the country's monetary and financial systems. It amended the Exchange Fund Ordinance, to enable the Exchange Fund to be used by the Financial Secretary to maintain the stability and integrity of monetary and financial systems. At that time, banking supervision was conducted by the Office of the Commissioner of Banking. To assist the Financial Secretary in achieving the statutory monetary policy objectives, it was decided that the Financial Secretary would be given the power to appoint a person to serve as the Monetary Authority, and that the Office of the Commissioner of Banking would be merged with the Office of the Exchange Fund to create the HKMA (with the Monetary Authority as its chief executive).

The HKMA is accountable to the people of Hong Kong, China through the Financial Secretary, and through laws passed by the Legislative Council to set out the Monetary Authority's powers and responsibilities. The HKMA's Chief Executive appears before the Panel on Financial Affairs of the Legislative Council three times a year, to brief Members and answer questions on the HKMA's work. Representatives from the HKMA occasionally attend Legislative Council Panel meetings to explain and discuss particular issues; they also attend Committee meetings to assist Members in their scrutiny of draft legislation.

The operating and staff costs of the HKMA are charged to the Exchange Fund. The Exchange Fund derives most of its income from its investment activities, although revenue also accrues from license fees paid by authorized institutions (AIs), rental payments from tenants, and custodian and transaction fees from users of the HKMA's Central Money Markets Unit. The HKMA is accountable to the Financial Secretary. The HKMA's annual budget and strategic plan are approved by the Financial Secretary on the advice of the Exchange Fund Advisory Committee (EFAC), and a number of the HKMA's powers are exercisable only after consultation with the Financial Secretary.

The HKMA may be described as a de facto central bank, in that it has the policy objectives of maintaining currency stability within the framework of the linked exchange rate system; managing the Exchange Fund; promoting the stability and safety of the banking system; and maintaining the development of the financial infrastructure.

Promoting the safety and stability of the banking system through the regulation of banking and deposit-taking businesses and the supervision of AIs is a primary function of the HKMA. This responsibility is shared among three departments:

• the Banking Supervision Department, which handles the day-to-day supervision of AIs;
• the Banking Policy Department, which formulates supervisory policies to promote the safety and soundness of the banking sector; and
• the Banking Development Department, which formulates policies to promote the development of the banking industry.

Using the CAMELs approach, the HKMA evaluates the capital and risk levels of AIs, including various non-credit risks such as interest rate risk in the balance sheet, liquidity risk, and reputation and strategic risks. This approach was further refined in 2008, in light of implementation experience and lessons drawn from the global financial crisis. The assessment of some risk factors was enhanced, such as credit concentration risk, liquidity risk, corporate governance, and system controls. The supervisory review of AIs involves on-site examinations, off-site reviews, prudential meetings, meetings with boards of directors, co-operation with external auditors, and sharing of information with other supervisors. The HKMA's aim is to ensure that any problems affecting authorized institutions are detected and addressed at an early stage.

In addition, the HKMA carries out the day-to-day administration of the Deposit Protection Scheme (DPS) on behalf of an independent Deposit Protection Board, whose functions are confined to the assessing and collecting contributions, investing funds, and paying compensation to depositors in the event of a bank failure.

2.3 Financial Supervision in Singapore

Singapore has an integrated financial regulatory structure, under which the Monetary Authority of Singapore (MAS) has the authority to regulate the banking, securities, futures, and insurance industries (Figure 3 [ PDF 86.6KB | 1 page ]). The MAS is also Singapore's central bank, created by an Act of Parliament in 1970. Before the establishment of the MAS, monetary functions were performed by various government departments and agencies. However, the demands of an increasingly complex banking and monetary environment necessitated the streamlining of functions to facilitate the development of a more dynamic and coherent policy on monetary matters.

In 1977, in a continuing effort to streamline various financial sectors, the government decided to bring the regulation of the insurance industry under the control of the MAS. The regulatory functions under the Securities Industry Act enacted in 1973 were also transferred to the MAS in 1984. In 1986, the Futures Trading Act was implemented and administered by the MAS. In 2002, Singapore's Board of Commissioners of Currency merged with the MAS to rationalize central banking. Since then, the MAS has been the authority responsible for monetary and exchange policies promoting the growth and stability of the economy.

The MAS board of directors is composed of a chairperson and four to nine directors. The chairperson is appointed by the president of Singapore, upon the recommendation of the cabinet. The directors are appointed by the president. No one hailing from any financial institution licensed by the MAS may be appointed as a MAS director. A managing director, appointed by the president from one of the current directors, is responsible for the day-to-day administration of the MAS.

The board is responsible for policymaking and general administration of the affairs and business of the MAS. It informs the government of regulatory, supervisory, and monetary policies. The MAS has operational autonomy, although the board remains accountable to the Parliament.

As the integrated supervisor of the financial services sector, the MAS conducts risk-based supervision of financial institutions. This includes authorization or licensing of financial institutions to offer financial services; setting regulatory rules and standards; and taking actions against institutions and individuals for regulatory breaches. The MAS also monitors the financial system to identify emerging trends and potential vulnerabilities, in order to guide and support its regulatory activities.

The Prudential Supervision Department in the MAS is mainly responsible for banking supervision. It is composed of five departments, with the following responsibilities:

1. Banking Supervision Department. The Banking Supervision Department (BD) is responsible for the licensing and supervision of banks, merchant banks, and finance companies. The department helps foster the stability and strength of Singapore's financial system by monitoring the safety and soundness of banks and other institutions under their supervision, and actively promotes the adoption of international best practices in corporate governance and risk management.
2. Insurance Supervision Department. The Insurance Supervision Department (ID) administers the Insurance Act and has the primary objective of protecting policyholders' interests. The ID adopts a risk-based approach to the prudential and market conduct supervision of insurance companies. The ID carries out its responsibilities by way of both on- and off-site supervision, and works with foreign supervisors as part of a holistic supervisory approach. In its standards development role, the ID works closely with industry associations to promote the adoption of best practices.
3. Prudential Policy Department. The Prudential Policy Department (PPD) is responsible for formulating capital and prudential policies for banks, insurance companies, and securities firms to promote a sound and dynamic financial sector. It works to achieve a more harmonized regulatory framework that will minimize regulatory arbitrage, and facilitate a more integrated, risk-based supervisory approach.
4. Complex Institutions Supervision Department. The Complex Institutions Supervision Department (CI) is mainly responsible for the licensing and supervision of large domestic finance groups and branches of foreign banks. The CI supervises local financial groups across banking, insurance, and securities activities.
5. Specialist Risk Supervision Department. The Specialist Risk Supervision Department (SRD) provides the financial and technology risk expertise necessary for MAS' supervisory and regulatory functions, and the assessment of individual institutions and system-wide risks. The SRD monitors developments and trends in the financial sector, and seeks effective and efficient approaches to mitigate identified risks. It also oversees payment infrastructures with the objective of fostering their stability and efficiency.

2.4 Financial Supervision in Taipei,China

The Financial Supervisory Commission (FSC) in Taipei,China was established on 1 July 2004 to promote integrated financial supervision. The Commission consolidates the supervision of banking, securities, and insurance sectors, and acts as a single regulator for all of these industries. The establishment of the FSC signifies more than just the transfer or consolidation of financial regulation; it represents the birth of a new service-driven culture of financial supervision in Taipei,China.

The newly established FSC functions as a quasi-independent agency that directly reports to the Executive Yuan. The Commission's responsibilities include supervision, examination, and inspection of the financial market. The FSC is headed by nine commissioners, including the chairperson and two vice chairpersons. All the commissioners are nominated by the Premier to the President for appointment.

The FSC includes four bureaus and five supporting departments (Figure 4 [ PDF 12.4KB | 1 page ]). The Banking Bureau, the Securities and Futures Bureau, and the Insurance Bureau are responsible for supervising financial institutions. The Examination Bureau is in charge of examining financial institutions, and consists of examination staff from the Central Bank, the Ministry of Finance and the Central Deposit Insurance Corporation. This has provided better administrative and human resources for conducting financial examination under one agency.

The Banking Bureau is mainly responsible for banking supervision and ensuring the stability and safety of the banking industry. The organization of the Banking Bureau includes the Legal Regulation Division, Domestic Banks Division, Credit Cooperatives Division, Trust and Bills Finance Companies Division, Foreign Banks Division, and Financial Holding Companies Division.

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