• Document Number：No. 6 [2015] of the General Office of the Shanghai Branch of the China Banking Regulatory Commission
• Area of Law： Banking & Finance
• Level of Authority： Local Regulatory Documents
• Date issued：01-15-2015
• Effective Date：01-15-2015
• Status： Effective
• Issuing Authority： China Banking Regulatory Commission, Shanghai Bureau

Notice of the General Office of the Shanghai Branch of the China Banking Regulatory Commission on Risk Alerts Regarding the Implementation of New Interbank Regulations by Branches of Foreign Banks in Shanghai
(No. 6 [2015] of the General Office of the Shanghai Branch of the China Banking Regulatory Commission)
All branches of foreign banks in Shanghai:
In accordance with the relevant requirements of the Notice of the China Banking Regulatory Commission on Conducting Special Inspections on Banking Financial Institutions' Implementation of New Interbank Regulations (No. 250 [2014], General Office of the CBRC), branches of foreign banks in Shanghai conducted self-inspection on interbank business in October 2014. The Shanghai Branch of the CBRC conducted on-site inspection on the implementation of new interbank regulations by some branches of foreign banks in Shanghai in November 2014. According to the results of on-site inspection, the institutions inspected have basically established internal control mechanisms suitable for their own risks for their interbank business. However, there are still such problems as deficiencies in capital and provisions system for the interbank business, lack of five-category interbank assets classification system, misapplication of accounting items, and vulnerable aspects in compliance administration, etc. To promote banks to further improve the building of the interbank business system, and strengthen internal controls, the Shanghai Branch of the CBRC has put forward the following risk alerts for relevant problems:
I. Main problems
1. Deficiencies in capital calculation and provision for the interbank business
In accordance with the relevant requirements of the Notice of the China Banking Regulatory Commission on Conducting Special Inspections on Banking Financial Institutions' Implementation of New Interbank Regulations (No. 250 [2014], General Office of the CBRC), banking financial institutions shall formulate the corresponding systems and measures for the capital and provisions for the interbank business; accurately measure risks and set aside capital and provisions accordingly based on the nature of the underlying assets, under the “substance over form” principle; and set aside provisions and calculate capital occupation for other interbank assets business in accordance with relevant provisions.
It is found in this inspection that some branches of foreign banks have not formulated capital and provisions system for the interbank business; and some branches whose general provisions are set aside by head offices on their behalf have no idea how provisions are set aside in the internal models of head offices and whether interbank business is included, or have any control measures to ensure that the provisions set aside by their head offices meet the local requirements.
2. Failure to establish a five-category interbank assets classification system
In accordance with Article 18 of the Guidance for the Risk-Based Loan Categorization, “the various assets other than loans, including direct credit alternative items of the off-balance-sheet items, shall also be divided into five categories: normal, concerned, inferior, doubted and loss, according to the net asset value, a debtor's ability of repayment, a debtor's credit rating and security condition, and the last three categories shall be called together non-performing assets.”
It is found in this inspection that some branches of foreign banks have not established the five-category interbank assets classification system, but adopt the risk rating of their head offices for interbank business counterparties. As the rating of the interbank business counterparties of foreign banks' branches is usually high, risk classification management for interbank business is likely be ignored and the internal rating of the head offices fails to correspond with the local five-category classification, which may lead to inaccurate provisions for interbank assets.
3. Confused using or misuse of accounting items
In accordance with the relevant provisions of the Notice on Regulating the Interbank Business of Financial Institutions (No. 127 [2014], PBC), funds under interbank lending shall be calculated under the accounts “Lent Funds” and “Borrowed Funds”, and sub-accounts shall be created under the aforesaid accounts for management and accounting; funds under the interbank deposit shall be calculated under the accounts “Due to Banks” and “Due from Banks;” Funds under interbank borrowing shall be calculated under the accounting accounts “Lent Funds” and “Borrowed Funds;” and when being engaged in interbank business, financial institutions shall, in accordance with the requirements of the relevant state laws and regulations and accounting rules, adopt correct accounting treatment methods, and ensure that all types of interbank transactions and the trading links thereof can be timely, completely, veraciously and accurately recorded and reflected on or off the balance sheet.
It is found in the self-inspection of institutions and the supervisory inspection that some branches of foreign banks have defects in the standardization of interbank business contract texts and the accuracy of accounting, and misuse in accounting items, such as mistaken recording of non-interbank deposits under the account of “Due to Banks” and interbank borrowing under the account of “Due to Banks.” In addition, the head offices of some branches of foreign banks fail to distinguish the accounts of interbank lending, interbank deposits, and interbank borrowing, but use the same account in a mixed manner. Branches distinguish interbank lending, interbank deposits, and interbank borrowing under their accounts by manual marks, but have not formulated corresponding operating manuals, which still awaits further improvement.
4. Expiry in interbank financing business
In accordance with the relevant provisions of the Notice on Regulating the Interbank Business of Financial Institutions (No. 127 [2014], PBC), “when being engaged in interbank business, financial institutions shall determine financing maturity in a reasonable and prudential manner. In particular, the maximum maturity of interbank borrowing is three years, while that of any other interbank financing business is one year. Financing maturity may not be renewed upon expiry.”
It is found in the self-inspection of institutions and the supervisory inspection that some branches of foreign banks has misunderstanding in interbank financing business and regards interbank financing business as interbank lending business without considering interbank borrowing business, which makes the maturity of interbank financing business other than interbank borrowing exceeds one year. And the problem has not been found in a timely manner in the self-inspection of institutions.
5. Deficiencies in self-inspection and compliance effectiveness
It is found in the self-inspection report and the regulatory inspection that some branches of foreign banks fail to mention relevant problems found in self-inspection in the interbank business self-inspection reports submitted, indicating that these branches have insufficient understanding of the new interbank regulations, fail to attach sufficient importance to self-inspection, and self-inspection becomes a mere formality.
According to the problems found in the regulatory inspection, some branches of foreign banks have misinterpretation of the relevant requirements of the new interbank regulations and implement the regulatory requirements insufficiently, reflecting the vulnerable aspects of branches in compliance management.
II. Regulatory requirements
1. Screening risk points of the interbank business
All branches shall attach great importance to the relevant circumstances of such risk alerts, screen risks in a targeted manner in light of the aforesaid problems on the basis of the previous self-inspection on the implementation of new interbank regulations, effectively implement the various requirements of the new interbank regulations, and establish an internal control system suitable for branches' interbank business development and risk level.
All branches shall screen the risk points and report to the General Office of the Shanghai Branch in writing before February 15, 2015 and the reports shall be signed by the presidents of the branches for confirmation. The screening reports shall elaborate whether a branch has the aforesaid problems. If problems are found in screening, the rectification work shall be included in the report. All branches shall inform the head offices or regional head offices of the risk alerts.
2. Intensifying self-inspection and improving the effectiveness of self-inspection
All branches shall strengthen the construction of inline self-inspection system, fully understand all previous risk alerts and self-inspection notices issued by the General Office of the Shanghai Branch, ensure that all key risk points are included in the scope of branches' self-inspection, and achieve full coverage of self-inspection. Concurrently, branches shall earnestly improve the sense of responsibility and professional proficiency of self-inspectors, intensify accountability for violations committed repeatedly upon repeated investigations and mistakes repeatedly made upon repeated correction, and insure practically effective self-inspection. Compliance departments, as the departments that take the lead in the self-inspection and the departments that receive reports submitted, shall ensure the timeliness of the submission of self-inspection reports, as well as the comprehensiveness, relevance and effectiveness of self-inspection. The management of the branches shall offer sufficient support to the compliance departments, including, but not limited to the resources, manpower and management technologies.
3. Enhancing compliance awareness and strengthening compliance management capabilities
All branches shall further strengthen compliance awareness, attach importance to compliance management, understand and actively implement the local regulatory requirements, and strengthen the supervision and inspection of the overall situation of compliance risks. The compliance departments of all branches shall correctly understand the meaning and spirit of the laws, regulations and various regulatory policies, effectively implement the compliance management responsibilities, enhance the effectiveness of compliance work, and assist the management in effectively identifying and managing the compliance risks of banks. Relevant business departments shall also fully understand and implement various compliance requirements during the processes of carrying out business, and coordinate with and implement the corresponding requirements on self-inspection. All branches shall organize solid and effective compliance training in their banks, effectively improve the compliance awareness of all employees, and create the compliance culture of “compliance by each person.”
The General Office of the Shanghai Branch shall randomly inspect the screening and rectification of risk points of all branches. And the General Office of the Shanghai Branch will take corresponding regulatory measures and hold relevant senior executives liable, for the institutions with problems or risk events of the same nature and type, despite of risk alerts which have been offered.
General Office of the Shanghai Branch of the China Banking Regulatory Commission
January 15, 2015