China firms bank risk management rules

As well as adopting independent audits, commercial banks must step up supervision over senior managers and boards of directors and improve internal controls, CBRC said.

The statement said the guidelines required banks to report losses exceeding acceptable levels of market risk, the impact of big volatility in global markets on their operations, and illegal trading activities.

Commercial banks would need to assess any potential risk to ensure it was compatible with their capital levels, it said.

The move comes as China races to transform state banks — indebted by decades of lending to inefficient state firms — into profitable lenders with strong balance sheets.

China is keen to avoid a repeat of the scandals that clouded the flotation of BOC Hong Kong (Holdings) Ltd, the overseas arm of state-run Bank of China, whose former Chief Executive was arrested last year following a probe into loans.

Some commercial banks have already embarked on reforms that include creating risk control mechanisms, partly to guard against future bad debts, but analysts say it could take years before the banking system has adequate risk controls.

Efforts to reform the banking sector, laden with at least $200 billion in bad debt, are gaining urgency because foreign banks will gain full access to the market in late 2006, according to WTO rules.

Bad loans plaguing the banking system have largely been amassed through old lending practices that have since become unacceptable.

However, inadequate risk controls at Chinese banks and a recent commercially-driven lending frenzy could prompt new sour loans down the line.