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Customers deposit money in a bank, and then the bank makes loans with these deposits to qualified borrowers. Whether a customer deposits money in a bank or applies for a loan, there is a lot of information to consider. For instance, let’s say you deposit money into a savings account at a local bank. What minimum balances are you required to keep? Also, are you charged a penalty if your account falls below the minimum amount? When you apply for a loan for a used car, do you know if the interest rate is allowed to vary, or is it fixed for the life of the loan? If it is allowed to vary and interest rates go up, the total amount of interest you owe will increase.
Banks are required to provide customers clear and accurate information about services, such as savings accounts, loans and credit cards. For example, a bank’s brochure for a savings account should include information on any minimum balance required, monthly service fee and the average percentage yield. In addition, the Truth in Lending Act requires banks to disclose the finance charge and the annual percentage rate so that a consumer can compare the prices of credit from different sources. It also limits liability on lost or stolen credit cards. These laws ensure that consumers and banks make decisions based on the same information.
If consumers have a complaint about a financial institution they can contact the Federal Reserve. Together with the twelve Federal Reserve Banks, the Board of Governors can answer questions about banking practices and investigate complaints about specific banks under its supervisory jurisdiction.
7. Community Reinvestment
At the time the Community Reinvestment Act (CRA) was passed in 1977, the banking industry and community groups were concerned about “redlining” or the refusal of a bank to lend money to low-income communities, while, at the same time, accepting deposits from those areas. CRA requires that financial institutions help meet the credit needs of their entire communities, including low-and moderate-income areas. Examiners review the bank’s lending in its community, such as the number and amount of loans made to low-, middle- and upper-income borrowers. CRA provides the bank flexibility in meeting requirements, such as allowing a bank to define its community and how to determine the credit needs of the low-and middle-income neighborhoods. Rebuilding and revitalizing communities through sound lending and good business judgment benefits both communities and banks.
IV. Banking Supervision in China
Regulations and execution of Chinese banking supervision
China’s entry into WTO has put forward a higher requirement to Chinese banking supervisory regulations. How to perfect the banking regulation law is the first task of the China Banking Regulatory Commission (CBRC). Standardized and systemic legislation should be paid more intension to perfect the banking supervisory regulations system, improve the supervisory skills and the overall quality of personnel in order to adapt the development of new situation.
The year of 1995 is known as the year of financial lawmaking. China successively passed The Law on People’s Bank of China and The Law of the People’s Republic of China on Commercial Banks , indicating China’s banking supervisory law system initially formed. They become the core of China’s banking supervisory system. In addition, except them, the current system still comprises the administrative regulations issued by State Council and bank supervisory regulations issued by the People’s Bank of China . From the form’s point of view, it seems perfect for China’s banking supervisory law system. However, in the practice, many circumstances exist like overlapping of regulations, lacking in harmony and incompatibility.
After China’s entry into WTO, foreign banks and financial institutions come into China constantly, which will not only change China’s current financial institutions, but also affect the actual financial functional regulations. The international development of banking supervisory regulations will be the necessary option for high-quality and effective supervisory framework. The regulations should be revised to meet the new requirements.
On Aril 28th 2003, China Banking Regulatory Commission (CBRC) was formally established. The establishment of CBRC is a milestone of China’s financial system reform. The main functions of CBRC are as follows: 1) Formulate supervisory rules and regulations governing the banking institutions; 2)Authorize the establishment, changes, termination and business scope of the banking institutions; 3) Conduct on-site examination and off-site surveillance of the banking institutions, and take enforcement actions against rule-breaking behaviors; 4) Conduct fit-and-proper tests on the senior managerial personnel of the banking institutions; 5) Compile and publish statistics and reports of the overall banking industry in accordance with relevant regulations 6) Provide proposals on the resolution of problem deposit-taking institutions in consultation with relevant regulatory authorities; 7) Responsible for the administration of the supervisory boards of the major State-owned banking institutions; and Other functions delegated by the State Council.
The supervision of CBRC focuses on: Conduct consolidated supervision to assess, monitor and mitigate the overall risks of each banking institution as a legal entity; Stay focused on risk-based supervision and improvement of supervisory process and methods; Urge banks to put in place and maintain a system of internal controls; Enhance supervisory transparency in line with international standards and practices.
Moreover, for the purposes of improving banking regulation and supervision, standardizing banking supervisory process and procedures, preventing and mitigating financial risks in the banking industry, protecting the interests of depositors and other customers, as well as promoting a safe and sound banking industry in China, the Law of the People’s Republic of China on Banking Regulation and Supervision is enacted.
Current Problems
1. Neglect of market competition
The current situation of Chinese banking supervision still bears the characteristic of strong planned economy, getting adrift from the rule of market competition. Only for instance of “civilian banking industry”, it reflects that the minimum amount of registerd capital required by The Law of the People’s Republic of China on Commercial Banks is too high. The minimum registered capital for setting up a commercial bank is RMB 1 billion yuan, which is 122 times higher than the minimum capital requirement of U.S. national banks; for urban cooperative commercial bank RMB 100 million yuan, and for rural cooperative commercial bank RMB 50 million yuan, which is 6 times higher than the same requirement of U.S. national banks.
Properly increasing the competitors of banking market can solve the problem of “underground finance” in some degree, since those emerging competitors can naturally circulate as well as take in and send out abundant idle funds, which will stimulate the development of banking retail business and increase the equity capital of emerging banks. Moreover, it is far from enough to just lower the entry level, many regulations need to be perfected to maintain the proper competition of banking industry, such as antitrust law, regulations of bank mergers and acquisitions, bank holding companies and bank deposit insurance.
2. The hysteretic construction of supervisory regulations
There are many overlaps, incompatibility and even direct conflicts between bank supervisory rules and regulations themselves and with the Law of People’s Bank of China and the Law of PRC on commercial banks. Gross Settlement Procedures which came into force in 1997 directly copied many regulations of PRC Negotiable Instruments.
The Law of PRC on Commercial Banks and relevant department regulations emphasis excessively on supervision of commercial banks’ business. Most of the rules in Chapter III “protections for the depositors” and Chapter IV “basic rules governing loans and other businesses” are the regulations on the private relationship between banks and clients. This tropism of legislation reflects the fact that legislators try to realize its supervisory objective by strictly regulating private relationships which otherwise shows its administrative intervention on private area.
China is in the process of transition from the planned economy to the market economy system, the current laws, in particular for the regulations before the introduction of "the People's Bank Law," "Law on Commercial Banks" are necessary for cleanup. Again, the specific regulations of People’s Bank on detailed area are ripe to be systematic. U.S. Federal Reserve Board’s 26 letter serial numbers listed in the management is worth learning from.
There is another important issue with regard to the scope of banking business. While the bigger the scope is, the more chances the profits will be gained, the more risk will occur. Currently, China still implements business by division of occupation. As for the tendency of international banking from separation to harmonization, China should pay great attention on it.
Banking supervisory regulations are also incompatible with WTO national treatment principle. Domestic and foreign financial institutions have been strictly distinguished. Current regulations are very administrative and flexible on national treatment principle.
3. Lack of perfect mechanism for withdrawal from the market
The law of PRC on Commercial Banks regulates particularly on this kind of supervision in Chapter VII “take-over and termination”, but it is too simple on its supervision of withdrawal from the market due to bankruptcy or voluntary withdrawal by only four principle of regulations. There is no regulation on redemption of debt, recombination, effective capital take-over, trusteeship of closed banks. Additionally, banks are different from normal enterprises, its bankruptcy may erect a series of social problems. Therefore, supervision should be set up for the whole lot of the bankruptcy procedure. The authorities should take tough measures to establish the market withdrawal mechanism and to create a portfolio investment environment.
Measures to perfect the banking supervisory regulations system
1. To perfect the on-site examination in China
Building of the on-site examination is urgent, procedures of screening and protection of the power of inspection are the core of the system, It can draw on the experience of the United States, granting regulators the absolute right to inspect without advance notice, and once a bank is checked, Inspection Administration will have control of all information and property of the bank, to avoid intervention forces hampering the inspection process. Meanwhile, the law should also strengthen the responsibility of the inspectors.
The banking regulatory authority may take the following measures to conduct on-site examination for the purpose of exercising prudential supervision: (1) to enter a banking institution for on-site examination; (2) to interview the staff of the banking institution and require them to provide explanations on examined matters; (3) to have full access to and make copies of the banking institution’s documents and materials related to the on-site examination, and to seal up documents and materials that are likely to be removed, concealed or destroyed; and (4) to examine the banking institution’s information technology infrastructure for business operations and management.
2. To perfect the offsite surveillance in China
A critical part of the offsite process is the analytical skills of the individual financial analysts requested to make judgments regarding the bank’s financial condition. It follows that credible systems have to be complemented by skilled and trained financial analysts, and China’s unique economic and social factors will invariably help shape its offsite surveillance practices.
The Law of the People’s Republic of China on Banking Regulation and Supervision stipulates that the banking regulatory authority shall conduct off-site surveillance of the business operations and risk profile of banking institutions. For this purpose, it shall establish a supervisory information system to analyze and assess the risk profile of banking institutions.
Development of an offsite system carries the promise that the periodical financial reports currently generated by the banks could be used even more efficiently to generate an early warning system, using, for example, peer group analysis to detect broad trends affecting the financial sector. Implementing an effective offsite system in China requires overcoming some obvious, though surmountable, impediments. Just the vastness of our nation presents a major obstacle. Also, in China, the headquarters of the state-owned banks have traditionally delegated control to the local branches. The strong tradition of local autonomy has impeded comprehensive consolidated risk management systems, preparing timely consolidated financial statements and generating comprehensive supervisory reports.
Chinese banks are hindered by the information collection and dissemination systems for timely internal risk control analysis. Chinese banks are aware of the need to modernize the banking technology, including setting up a modern information system with real-time risk monitoring. Although the impetus for developing internal risk management can come from prescribed regulatory reporting requirements, the end result can be a banking system with more sophisticated risk management tools.
Up-to-date, after the operation testing in 2006, the national off-site surveillance information system for China’s banking industry officially started operating, which is a great reform in the history of China’s supervisory methods .
3. Credit Information System
In order to be successful, a Credit Information Bureau should adhere to several principles. First, clear and transparent rules governing the management of the Bureau, collection of information and the procedures for sharing it with the banking community. Second, the bureau should cooperate with the banking industry and address explicitly up-front the banking industry’s concerns. Enhancing the transparency of credit exposure (including contingent liabilities), collateral and delinquencies of borrowers through a Bureau is highly desirable in China.
When a banking institution is experiencing or likely to experience a credit crisis, thereby seriously jeopardizing the interests of depositors and other customers, the banking regulatory authority under the State Council may take over the banking institution or facilitate a restructuring. The take-over or restructuring shall be carried out in accordance with applicable laws and administrative regulations.
4. Isolation from non-bank activity risks
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