Laws of the People's Republic of China

Opinions of Shanghai Regulatory Bureau under China Banking Regulatory Commission on the Supervision and Administration of Foreign Legal-Person Banks in Shanghai Municipality

Hu Yin Jian Fa [2007] No.125

All the solely foreign-owned banks and Chinese-foreign joint-venture banks in Shanghai:

According to the principle of territorial supervision over legal-person banks, this Branch will, under the unified leadership of China Banking Regulatory Commission, implement risk-based supervision over legal-person banks by focusing on the ideal of prudent supervision and risk supervision. For the purpose of enhancing the efficiency and transparency of supervision, the following opinions are hereby proposed on the supervision over foreign legal-person banks in Shanghai:

1.

Foreign legal-person banks shall fully acquaint themselves with the regulatory thoughts of regulatory departments and actively assist them in jointly promoting the sound and stable operation of banks.

The principle of territorial supervision shall be adopted by China Banking Regulatory Commission applies for foreign legal-person banks. Under the unified guidance of China Banking Regulatory Commission, this Branch will perform the major duties of supervision over the legal-person banks in Shanghai. The principal off-site supervisors will make further investigation to know more about each bank, frequently visit these banks and do well in risk assessment and early warning. The principal on-site inspector shall attach more importance to verifying the implementation of each mechanism through on-site testing, and make various inspection methods including investigation and verification to improve the efficiency and effect of inspection. Meanwhile, each bank shall be graded according to the sufficient communication between the principal supervisor and the principal inspector, and grading results shall be linked up with regulatory measures and market access. Each bank shall further understand the regulatory principle, methods and requirements over foreign legal-person banks and do well in making lower levels know policies and carry out internal training. The related organs of each bank shall actively reinforce communication and exchange with regulatory departments to improve communication effects and guarantee the bank operates in a sound and stable manner.

2.

Foreign legal-person banks shall improve corporate governance and reinforce comprehensive risk management and compliance management

This Branch will emphasize on corporate governance, comprehensive risk management and compliance management of banks. Each bank shall keep the business development level fit for its risk management capacity and compliance control capacity.

(1)

As regards corporate governance, each bank shall further improve its corporate governance structure and mechanism, and the board of directors and the senior management level shall perform duties effectively. According to the principle of territorial supervision and the general situation of classified supervision, this Branch will regularly hold more meetings and exchange ideas with the board of directors and the senior management level of each bank, present the meeting of the board of directors as a nonvoting delegate when necessary, hold talks with the shareholders of each bank attracting much attention, and hold annual conversation concerning prudence with the senior management level. Each bank shall timely report this Branch the board meeting information in time for making regulatory arrangement.

(2)

As regards comprehensive risk management, each bank shall make more efforts to perfect its risk management mechanism and the comprehensive risk management level so as to make its risk management capacity fit for its business scale, complicated procedure and developing speed.

(3)

As regards compliance management mechanism, each bank shall, on its own initiatives, reinforce identification management and self-assessment of compliance risks so as to set up a sufficient and effective compliance management mechanism.

3.

Foreign legal-person banks shall reinforce the independency and efficacy of internal auditing work and give real play to the role of inner control as the third line of defense

Each bank shall further reinforce the building-up of internal auditing committee to enhance the independency, efficacy and appropriateness thereof. This Branch will set up a mechanism to make regular communication and exchange with the internal auditing department of each bank and, according to regulatory needs, propose the requirements of regulatory authorities on the items under internal auditing. The internal auditing department of each bank shall accomplish the auditing of the stipulated items as required, directly send the auditing report to this Branch and affix the auditing scheme, which shall list the auditing procedure, methods and selective inspection results. This Branch will reevaluate the quality of these auditing reports and regularly hold meetings the persons responsible for internal auditing of all banks attends to communicate and exchange regulatory opinions and information.

4.

Foreign legal-person banks shall strengthen the responsibilities for internal management and conduct self-assessment on corporate governance mechanism, comprehensive risk management mechanism and compliance management mechanism

Self-assessment mechanism shall be promoted by this Branch among foreign banks. A foreign legal-person bank newly established shall make annual self-assessment on corporate governance mechanism, comprehensive risk management mechanism and compliance management mechanism (for the specific format and content, see affixes) from the first year when it officially starts operation. Self-assessment will be deemed as an organic component part of comprehensive risk supervision. This Branch will then reevaluate the self-assessment results and exchange ideas thereon with the high level of each bank on the basis of off-site daily supervision and on-site examination results. The self-assessment results and reevaluation results will be considered as important basis for regulatory grading and daily examination.

Affix:

1.

Report by Foreign Legal-person Banks Concerning the Self-assessment over Corporate Governance(omitted)

2.

Report by Foreign Legal-person Banks Concerning the Self-assessment of Comprehensive Risk Management(omitted)

3.

Report by Foreign Legal-person Banks Concerning the Self-assessment of Compliance Management(omitted)

China Banking Regulatory Commission, Shanghai Branch

April 27, 2007