PRC Banking Regulation Law

(Promulgated on December 27 2003 and effective as of February 1 2004.)

PART ONE: GENERAL PROVISIONS

Article 1: This Law is formulated in order to strengthen banking regulation, to standardize regulation, to prevent and dispel banking risk, to protect the lawful rights and interests of depositors and other customers, and to encourage healthy growth of the banking industry.

Article 2: The State Council banking regulatory authority shall be responsible for regulation of all banking financial institutions and their business activities throughout the country.

For the purposes of the Law, "banking financial institutions" shall mean financial institutions taking deposits from the public, such as commercial banks, urban credit cooperatives and rural credit cooperatives, and the policy banks, that have been set up within the People's Republic of China.

The provisions of this Law on regulation of banking financial institutions shall apply to the regulation of financial asset management companies, trust and investment companies, finance companies and lease-financing companies established within the People's Republic of China as well as other financial institutions established with the approval of the State Council banking regulatory authority.

The State Council banking regulatory authority shall in accordance with the relevant provisions hereof implement regulation of financial institutions it has approved for establishment outside China, and of the business activities outside China of those financial institutions referred to in the preceding two paragraphs.

Article 3: The objectives of banking regulation shall be to promote the lawful and sound operation of the banking industry and to safeguard public confidence in the banking industry.

Banking regulation shall safeguard fair competition within the industry and shall improve the competitiveness of the industry.

Article 4: When implementing banking regulation, banking regulatory authorities shall abide by the principles of legality, openness, fairness and efficiency.

Article 5: Banking regulatory authorities and their personnel working on regulation shall receive the protection of the law when carrying out their regulatory duties in accordance with the law. They shall not be subject to interference by local governments, government departments at any level, social organizations or individuals.

Article 6: The State Council banking regulatory authority shall, together with the People's Bank of China and other State Council financial regulatory bodies, set up a mechanism for sharing information on regulation.

Article 7: The State Council banking regulatory authority may establish cooperative regulatory mechanisms with other national or regional banking regulatory bodies and implement cross-border regulation.

PART TWO: THE REGULATORY AUTHORITIES

Article 8: The State Council banking regulatory authority shall establish agencies as required for carrying out its duties. The State Council banking regulatory authority shall exercise unified leadership and administration of its agencies.

The agencies of the State Council banking regulatory authority shall carry out regulatory duties within the limits of the authority granted them by the State Council banking regulatory authority.

Article 9: Personnel of banking regulatory authorities working in regulation shall possess the specialist knowledge and professional experience relevant to their duties.

Article 10:Personnel working in banking regulatory authorities shall be loyal to their work, act in accordance with the law, and be impartial and honest. They shall not abuse their position to gain unfair advantages or concurrently hold a position in an enterprise such as a financial institution.

Article 11:Personnel working in banking regulatory authorities shall keep state secrets in accordance with the law. They shall be responsible for safeguarding the confidentiality of banking financial institutions and parties concerned under their regulation.

The State Council banking regulatory authority and other national or regional banking regulatory authorities with which it is exchanging regulatory information shall make arrangements for that information to be kept confidential.

Article 12:The State Council banking regulatory authority shall publicize its regulatory procedures and shall set up a regulatory responsibility system and an internal monitoring system.

Article 13:When banking regulatory authorities are carrying out regulatory activities such as management of risk in banking financial institutions or inspection and handling of illegal financial activities, local governments and departments at all levels shall coordinate with them and assist them.

Article 14:The State Council auditing and monitoring organization, etc. shall monitor the activities of the State Council banking regulatory authority in accordance with the law.

PART THREE: REGULATORY DUTIES

Article 15:The State Council banking regulatory authority shall, in accordance with laws and administrative regulations, formulate and promulgate regulations and rules governing banking financial institutions and their business activities.

Article 16:The State Council banking regulatory authority shall, in accordance with the criteria and procedures stipulated in laws and administrative regulations, examine and approve the establishment of, changes in, termination of, and scope of business of, banking financial institutions.

Article 17:When there is an application to establish a banking financial institution, or a banking financial institution changes a shareholder whose total amount of capital or total number of shares held reaches or exceeds the stipulated proportion, the State Council banking regulatory authority shall examine the shareholder's source of funds, and its finances, ability to supplement its capital and creditworthiness.

Article 18:Business products offered by banking financial institutions shall be examined and approved by, or put on file with, the State Council banking regulatory authority in accordance with the provisions. Those business products that must be examined and approved, or put on file, shall have stipulations formulated and promulgated by the State Council banking regulatory authority in accordance with laws and administrative regulations.

Article 19:No work unit or individual shall set up a banking financial institution or engage in business activities of a banking financial institution without the approval of the State Council banking regulatory authority.

Article 20:The State Council banking regulatory authority shall implement qualifications administration on the directors and senior management personnel of banking financial institutions. Specific procedures shall be formulated by the State Council banking regulatory authority.

Article 21:Prudential management rules for banking financial institutions shall be stipulated in laws and administrative regulations and may also be formulated in accordance with laws and administrative regulations by the State Council banking regulatory authority.

Prudential management rules as referred to in the preceding paragraph shall include risk management, internal controls, capital adequacy ratio, quality of assets, reserves for losses, risk concentration, affiliated transactions, liquidity of assets, etc.

Banking financial institutions must strictly observe prudential management rules.

Article 22:The State Council banking regulatory authority shall within the stipulated period issue a written decision on whether or not to approve the following types of applications; and shall explain the reasons therefor if an application is not approved:

(1) within six months of the date of receipt of application documents to set up a banking financial institution;

(2) within three months of the date of receipt of application documents to make changes to or terminate a banking financial institution, or applications regarding scope of business or increase within scope of business of business products; and

(3) within 30 days of receipt of application documents for examination of the professional qualifications of directors and senior management personnel.

Article 23:Banking regulatory authorities shall conduct off-site regulation of the business activities and risk of banking financial institutions. They shall set up a regulatory information system for banking financial institutions and analyze and assess their risk.

Article 24:Banking regulatory authorities shall carry out on-site inspections of the business activities and risk of banking financial institutions.

The State Council banking regulatory authority shall formulate the procedures for on-site inspections and shall standardize on-site inspections.

Article 25:The State Council banking regulatory authority shall have supervision over banking financial institutions' consolidation of statements.

Article 26:The State Council banking regulatory authority shall reply to proposals from the People's Bank of China that a banking financial institution be examined within 30 days of receipt of the proposal.

Article 27:The State Council banking regulatory authority shall establish a grading system and a risk warning mechanism for regulation of banking financial institutions. It shall on the basis of a banking financial institution's grade and risk circumstances decide on the frequency and scope of on-site inspections and on what other measures need to be taken.

Article 28:The State Council banking regulatory authority shall set up a position responsibility system for the discovery and reporting of unforeseen incidents in the banking industry.

If banking regulatory authorities uncover events that may trigger risk to the banking system; or seriously affect social stability they shall immediately report to the person in charge of the State Council banking regulatory authority. If the person in charge of the State Council banking regulatory authority believes that it is necessary to report to the State Council he shall do so immediately, and notify relevant departments such as the People's Bank of China and the finance department of the State Council.

Article 29:The State Council banking regulatory authority shall, together with relevant departments such as the People's Bank of China and the finance department of the State Council, set up a system for dealing with unforeseen incidents in the banking industry. They shall formulate a plan for dealing with unforeseen incidents in the banking industry, clarifying the authorities and personnel that should deal with such incidents and their duties, measures to be taken and procedures to be followed in dealing with such incidents in a timely and efficient way.

Article 30:The State Council banking regulatory authority shall be responsible for the unified compilation of statistical data and statements on banking financial institutions nationwide and for promulgating these in accordance with the relevant state provisions.

Article 31:The State Council banking regulatory authority shall guide and monitor activities of self-regulation associations of the banking industry.

The charters of self-regulation associations of the banking industry shall be filed with the State Council banking regulatory authority for the record.

Article 32:The State Council banking regulatory authority may develop international exchange and cooperation activities relating to banking regulation.

PART FOUR: REGULATORY MEASURES

Article 33:Banking regulatory authorities have, in pursuit of their duties, the power to request a banking financial institution to submit balance sheets, profit statements, and other financial accounting and statistical statements and management information together with audit reports issued by a certified accountant.

Article 34:Banking regulatory authorities may take the following measures during on-site inspections in accordance with the requirement for prudential regulation:

(1) entry into a banking financial institution to conduct inspections;

(2) consultancy with the personnel of a banking financial institution, and requests to them to clarify matters related to the inspection;

(3) review and copying of a banking financial institution's documents and material related to the inspection, and sealing up for safekeeping of documents and material that may be moved, concealed or destroyed; and

(4) examination of the computer system used by a banking financial institution to manage business data.

On-site inspections shall be approved by the person in charge of a banking regulatory authority. When conducting on-site inspections there shall be not less than two inspectors who shall show legal documentation and written notification of the inspection. If there are less than two inspectors or if they do not show legal permits and written notification of the inspection the banking financial institution has the right to refuse the inspection.

Article 35:In pursuit of their duties, banking regulatory authorities may enter into supervisory dialogue with the banking financial institution's directors and senior management personnel, and request that they explain major points regarding the banking financial institution's business activities and risk management.

Article 36:Banking regulatory authorities shall order banking financial institutions to truthfully disclose to the public their financial accounting reports, details of their current risk management, changes to their directors or senior management personnel, and other important information.

Article 37:If a banking financial institution violates the rules of prudential management, the State Council banking regulatory authority or the relevant highest provincial-level agency shall order it to rectify the matter within a time limit. If this is not done within the stipulated time, or if the act(s) have seriously jeopardized the sound operation of the banking financial institution or prejudiced the lawful rights and interests of depositors or other customers, the following measures may, according to the respective circumstance, be taken with the approval of the State Council banking regulatory authority or the person in charge of the relevant highest provincial-level agency:

(1) order the institution to suspend part of its business and stop approving new types of business;

(2) restrict distribution of dividends or other income;

(3) restrict transfer of assets;

(4) order controlling shareholders to assign their equity or restrict relevant shareholders' rights;

(5) order the institution to adjust its directors or senior management personnel, or restrict their rights; and/or

(6) stop approval for establishment of branches.

After rectification the banking financial institution shall submit a report to the State Council banking regulatory authority or to the relevant highest provincial-level agency. Once this report has been checked and verified by the State Council banking regulatory authority or the relevant highest provincial-level agency to comply with rules of prudential management, any of the measures stipulated above that have been taken shall be removed within three days of the report being verified.

Article 38:If a banking financial institution has, or may have, credit crises, which seriously affect the lawful rights and interests of depositors and other customers, the State Council banking regulatory authority may in accordance with the law put the banking financial institution into receivership or institute structural reorganization. Receivership and structural reorganization shall be implemented in accordance with the relevant laws and State Council provisions.

Article 39:         If a banking financial institution operates in violation of the law, or if its operations are improperly managed, and failure to close it will seriously endanger the financial order or prejudice public rights and interests, the State Council banking regulatory authority has the right to close it.

Article 40:When a banking financial institution is taken into receivership, reorganized or closed down the State Council banking regulatory authority has the right to request that the directors, senior management personnel and other personnel of the banking financial institution carry out their duties in accordance with the requirements of the State Council banking regulatory authority.

During receivership, reorganization or liquidation after closure the following measures may with the approval of the person in charge of the State Council banking regulatory authority be taken against the directors and senior management personnel directly responsible, and other directly responsible personnel:

(1) if it would cause major losses to state interests should the directors and senior management personnel directly responsible, and other directly responsible personnel, leave the country, the immigration authorities may be notified to prevent their leaving the country; and/or

(2) application may be made to the judicial authorities to ban them from moving or transferring property, or placing the property to be subject to any other rights.

Article 41:With the approval of the State Council banking regulatory authority or the person in charge of the relevant highest provincial-level agency, banking regulatory authorities shall have the right to inquire about the bank accounts of banking financial institutions, their personnel, as well as other affiliated parties, that are suspected of involvement in illegal financial activity. With the approval of the person in charge of the banking regulatory authority application may be made to the judicial authorities to freeze the funds of those suspected of moving or concealing illegal funds.

PART FIVE: LEGAL LIABILITY

Article 42:If personnel of banking regulatory authorities who carry out regulatory work commit one of the following acts, they shall receive administrative penalties in accordance with the law. If a crime is constituted, criminal liability shall be pursued in accordance with the law:

(1) if in violation of the provisions they examine and approve the establishment of, changes to or termination of banking financial institutions, or examine and approve the scope of business of, or business products within the scope of, such financial institutions;

(2) if in violation of the provisions they conduct on-site inspections of banking financial institutions;

(3) if they fail to report unforeseen incidents in accordance with Article 28 hereof;

(4) if in violation of the provisions they inquire about bank accounts or apply to freeze funds;

(5) if in violation of the provisions they take measures against or penalize banking financial institutions; or

(6) other acts constituting an abuse of powers or neglect of duty.

If personnel of banking regulatory authorities who carry out regulatory work take bribes or divulge state secrets or commercial secrets learnt, and the act constitutes a crime, criminal liability shall be pursued. If the act does not constitute a crime, they shall receive administrative penalties.

Article 43:If a banking financial institution is set up without authorization, or if banking financial institution business activities are conducted illegally, the banking financial institution shall be closed down by the State Council banking regulatory authority. If the act constitutes a crime, criminal liability shall be pursued. If the act does not constitute a crime, the illegal income shall be confiscated by the State Council banking regulatory authority and the banking financial institution shall be fined between one and five times the amount of their illegal income if the illegal income is Rmb500,000 or more. If it has made no illegal income, or if the illegal income is less than Rmb500,000, it shall be fined between Rmb500,000 and Rmb2 million.

Article 44:A banking financial institution that commits any of the following shall be ordered to rectify matters by the State Council banking regulatory authority. If there is illegal income, it shall be confiscated. If the illegal income is Rmb500,000 or above, the banking financial institution shall be fined between one and five times the amount of the illegal income. If there is no illegal income or if the illegal income is less than Rmb500,000, the banking financial institution shall be fined between Rmb500,000 and Rmb2 million. If the circumstances are particularly serious, or if the banking financial institution fails to rectify matters within the time limit, it may be ordered to suspend business in order to rectify the matters or its business licence may be revoked. If the act constitutes a crime, criminal liability shall be pursued in accordance with the law:

(1) if it establishes branches without approval;

(2) if it makes changes or closes down without approval;

(3) if in violation of the provisions it conducts business activities that have not been approved or that have not been filed for the record; or

(4) if in violation of the provisions it increases or decreases the interest rate on deposits or loans.

Article 45:A banking financial institution that commits any of the following shall be ordered to rectify matters by the State Council banking regulatory authority and shall be fined between Rmb200,000 and Rmb500,000. If the circumstances are particularly serious, or if it fails to rectify matters within a time limit, it may be ordered to suspend business in order to rectify the matters or its business licence may be revoked. If the act constitutes a crime, criminal liability shall be pursued in accordance with the law:

(1) if it appoints directors or senior management personnel without examination of their qualifications;

(2) if it refuses or obstructs off-site regulation or on-site inspections;

(3) if it submits statements, reports or other information or material that is false or that conceals important matters;

(4) if it fails to disclose information in accordance with provisions;

(5) if it seriously violates the rules of prudential operations; or

(6) if it refuses to implement the measures stipulated in Article 37 hereof.

Article 46:If a banking financial institution fails to submit statements, reports or other information or material in accordance with provisions, it shall be ordered to rectify matters by the State Council banking regulatory authority. If the banking financial institution fails to do so within the time limit, it shall be fined between Rmb100,000 and Rmb300,000.

Article 47:If a banking financial institution violates laws, administrative regulations or relevant state provisions on banking regulation, banking regulatory authorities may, dependent upon different circumstances, adopt the following measures as well as imposing penalties as stipulated in Articles 43 to 46 hereof:

(1) they may order the banking financial institution to impose disciplinary penalties on the directors and senior management personnel directly responsible and other directly responsible personnel;

(2) if the act committed by the banking financial institution does not constitute a crime the directors and senior management personnel directly responsible and other directly responsible personnel may be warned and fined between Rmb50,000 and Rmb500,000; and

(3) they may revoke the professional qualifications of the directors and senior management personnel directly responsible for a set period or permanently, and may prohibit the directors and senior management personnel directly responsible and other directly responsible personnel from engaging in banking for a set period or permanently.

PART SIX: SUPPLEMENTARY PROVISIONS

Article 48:Where regulation of policy banks and asset management companies established within the People's Republic of China is provided otherwise by laws and administrative regulations, these laws and regulations shall prevail.

Article 49:Where regulation of foreign-invested banking financial institutions, Sino-foreign equity joint banking financial institutions and branches of foreign banking financial institutions established within the People's Republic of China is provided otherwise by laws and administrative regulations, those laws and regulations shall prevail.

Article 50:This Law shall be effective as of  February 1 2004.