In order to improve China’s regulatory framework for systemically important financial institutions (hereinafter referred to as SIFIs), forestall systemic risks, and effectively maintain the safety and soundness of the financial system, the People’s Bank of China (PBC), the China Banking and Insurance Regulatory Commission (CBIRC) and the China Securities Regulatory Commission (CSRC) jointly issued the Guidelines on Improving Regulation of Systemically Important Financial Institutions (No.301 [2018] of the PBC) (hereinafter referred to as the Guidelines) in recent days under the approval of the CPC Central Committee and the State Council.
In line with the general requirements of the CPC Central Committee and the State Council for “serving the real economy, preventing and controlling financial risks and deepening financial reforms,” the Guidelines follows the strategic arrangement of “integrated regulation of SIFIs”, draws sufficiently on the experience of other countries, proceeds from China’s financial development and regulation practices, adheres to the regulatory philosophy of combining macro-prudential management and micro-prudential regulation, clarifies the policy orientations of SIFI regulation, shores up weak links in financial regulation, guides large financial institutions in engaging in sound operations, and forestalls systemic financial risks.
The Guidelines clarifies the definition and scope of SIFIs, stipulates the procedures and overall methodology for SIFIs’ assessment, and properly identifies those financial institutions with systemic impact on the financial system. It improves SIFI regulation mainly in two ways. First of all, it sets special regulatory requirements for SIFIs, in a bid to enhance their capacities for business continuity and reduce the possibility of the occurrence of major risks. Relevant authorities will take corresponding prudential regulatory measures to ensure that SIFIs take risks on a reasonable basis and avoid blind business expansion. Secondly, relevant authorities will establish special resolution mechanism for SIFIs, promote the formulation of recovery and resolution plans, and undertake resolvability assessments, so as to ensure that major risks triggered by SIFIs are safely, rapidly and effectively resolved, with their key businesses and services undisturbed, and that the “too-big-to-fail” risks can be forestalled.
In the next step, relevant authorities will seriously implement the requirements set forth in the Guidelines based on their designated responsibilities, and proactively promote the introduction of relevant implementation rules. Financial institutions which are identified as SIFIs, need to operate in compliance with laws under the regulations of the Guidelines and its implementation rules.
Guidelines on Improving Regulation of Systemically Important Financial Institutions
Systemically important financial institutions (hereinafter referred to as SIFIs) play a significant role in the financial system, and their operations and risk profiles are directly related to the overall stability and soundness of the financial system and its capability to serve the real economy. In order to improve China’s regulatory framework for SIFIs, establish a mechanism for the identification, regulation and resolution of SIFIs, forestall systemic risks, and effectively maintain the safety and soundness of the financial system, the following guidelines are proposed under the approval of the CPC Central Committee and the State Council.
I. General Provisions
1. Definition of SIFIs. SIFIs are financial institutions which, due to their large size, complexity in structure and business and strong interconnectedness with other financial institutions, offer irreplaceable key services in the financial system, and can have material adverse impacts on the financial system and the real economy or even trigger systemic risks once major risk events lead to their business failures.
2. Scope of SIFIs. SIFIs in the Guidelines include systemically important banking, securities and insurance institutions, as well as other systemically important institutions engaged in financial businesses as identified by the Financial Stability and Development Committee of the State Council (hereinafter referred to as the FSDC).
Specifically, “banking institutions” refer to the legitimately established commercial banks, development banks and policy banks, “securities institutions” refer to the legitimately established incorporated institutions dealing in securities, futures and funds businesses, and “insurance institutions” refer to the legitimately established incorporated institutions that conduct insurance business.
3. Major approaches to improve regulation. The improvements of SIFI regulation are mainly realized in two ways.
(1) Special regulatory requirements are enforced on SIFIs, in a bid to enhance their capacities for business continuity and reduce the possibility of the occurrence of major risks.
(2) Relevant authorities will establish special resolution mechanism for SIFIs to ensure that major risks in SIFIs are safely, rapidly and effectively resolved, with their key businesses and services undisturbed, and that the “too-big-to-fail” risks can be forestalled.
The special regulatory requirements proposed in the Guidelines are additional regulatory measures imposed on SIFIs and do not replace any routine regulatory responsibilities of banking, securities and insurance regulatory authorities.
4. Working mechanism. The list of SIFIs will be determined by the FSDC based on the work of the PBC, the CBIRC and the CSRC. The PBC is responsible for basic rules formulating, monitoring, analysis and consolidated supervision for SIFIs. The PBC will, as appropriate, instruct relevant regulatory authorities to take corresponding regulatory measures and inspect and supervise financial institutions upon the approval of the State Council when necessary. The CBIRC and the CSRC are responsible for data collection, score calculation and list submission in SIFI assessment, and legally implement micro-prudential regulation. The PBC will work with the CBIRC, the CSRC, the Ministry of Finance and other relevant authorities to establish the special resolution mechanismfor SIFIs. Members of the FSDC shall strengthen information sharing and regulatory cooperation on SIFIs.
5. Regulatory responsibilities. Relevant authorities shall perform their responsibilities of SIFI regulation as designated in the Guidelines. In case of major financial risks due to the failure of relevant authorities to perform or to fully perform their regulatory responsibilities, the General Office of the FSDC will take the lead in initiating the accountability mechanism according to corresponding procedures.
6. Identification criteria and basic regulatory rules. The General Office of the FSDC will organize the PBC, the CBIRC and the CSRC to propose criteria for identifying systemically important banking, securities and insurance institutions and detailed regulatory rules for implementation based on the Guidelines, and such criteria and rules will be implemented upon the review and approval by the FSDC.
II. Assessment and Identification
7. Assessment procedures. The assessment of SIFIs will be conducted annually following the procedures below.
(1) Determine the scope of eligible institutions.
(2) Adopt an indicator-based measurement approach to identify SIFIs, specify quantitative assessment indicators and scoring methodology, create templates for data collection, and collect data required for assessments from eligible institutions.
(3) Calculate the systemic importance scores of eligible institutions, determine the threshold score to identify SIFIs, and develop an initial list of SIFIs.
(4) Make supervisory judgement taking into account other quantitative and qualitative analysis, and adjust the initial list of SIFIs.
(5) Determine and release the final list of SIFIs.
8. Scope of eligible institutions. Based on the characteristics of different sectors, the PBC, the CBIRC and the CSRC will develop criteria which are objective, quantitative, simple, and comparable, so as to define the scope of eligible institutions. Eligible institutions can be selected in line with either of the two criteria. The first is the size of financial institutions, which means that the aggregate on- and off-balance sheet assets of all eligible institutions shall make up no less than 75 percent of the total assets of the whole sector at the end of the previous year calculated by regulatory authorities by the same statistical standards. The second is the number of financial institutions, which denotes that the number of eligible banking, securities and insurance institutions shall be no less than 30, 10 and 10, respectively.
9. Assessment indicators. Quantitative assessment indicators are employed to calculate the systemic importance scores of eligible institutions. The assessment indicators are mainly used to measure the potential impacts of SIFIs’ operation failures on the financial system and the real economy, and tier-one assessment indicators include size, interconnectedness, complexity, substitutability, and asset liquidation. The PBC will work with the CBIRC and the CSRC to develop tier-two indicators and their weightings according to characteristics and development of different sectors.
10. Data collection. Based on the assessment indicators and the scope of eligible institutions reviewed and approved by the FSDC, the CBIRC and the CSRC will develop templates of data submission and instructions for data reporting. The instructions for data reporting include definitions of tier-two indicators, and the change in templates compared to the previous year. Eligible institutions shall complete and submit data of the previous accounting year before end-June every year. Regulatory authorities will examine data quality and supplement or amend data as appropriate, and share the supervisory statements, reported data and other relevant information of eligible institutions with the PBC.
11. Systemic importance score. After finishing data collection, the CBIRC and the CSRC will calculate the systemic importance scores of eligible institutions. Except where calculation methods are otherwise stipulated, the systemic importance score of an eligible institution is calculated by adding up all the products of each weighed indicator value, which is calculated by multiplying the proportion of each eligible institution indicator value in the total value and the indicator’s corresponding weight. Based on the scores, the CBIRC and the CSRC will determine the threshold score for SIFIs, and then develop an initial list of SIFIs and submit it to the General Office of the FSDC.
12. Supervisory judgement. Based on additional quantitative or qualitative information, the PBC, the CBIRC and the CSRC will propose the supervisory judgement to include in the list of SIFIs any financial institution whose systemic importance score is below a certain threshold, and submit the proposal along with the initial list to the FSDC General Office. When necessary, SIFIs can be grouped in accordance with systemic importance score to enable differentiated regulation.
13. List determination and disclosure. The initial list of SIFIs, data reported by related financial institutions and their systemic importance scores, and supervisory judgments, recommendations and supporting evidence shall be submitted to the FSDC for deliberation before end-August every year. Upon approval by the FSDC, the PBC and relevant regulatory authorities will jointly release the final list of SIFIs.
14. Review of and adjustments to assessment procedures and methodology. The FSDC will review the aforesaid assessment procedures and methodology and make necessary adjustments and improvements to them every three years. Where significant changes take place in a sector or the existing assessment procedures and methodology cannot satisfy the actual needs of forestalling systemic risks, the FSDC can carry out an additional review of the assessment procedures and methodology.
III. Special Regulatory Requirements
15. Additional regulatory requirements. The PBC, together with the CBIRC and the CSRC, will issue requirements on additional capital and leverage ratio requirements for SIFIs in addition to the minimum capital, reserve capital and countercyclical capital requirements, which will come into force after the deliberation and approval by the FSDC. In order to reflect the systemic importance of financial institutions, the additional capital shall be calculated by the consecutive method which means to select the financial institution with the highest systemic importance score as the benchmark institution, and determine its additional capital requirement. And the requirements for other institutions are determined by the ratio of their systemic importance scores to that of the benchmark institution. When grouping regulation is adopted, the institution with the highest systemic importance score in each group will be selected as the benchmark institution of the group, and the additional capital requirements for other institutions in the group are determined by the consecutive method.
Based on the characteristics of the financial sector, the PBC will work with the CBIRC and the CSRC, as appropriate, to impose additional regulatory requirements concerning liquidity and large exposures on SIFIs with higher systemic importance scores, which will come into effect after the deliberation and approval by the FSDC.
16. Corporate governance. Based on the existing regulatory requirements for governance, SIFIs shall further set up a governance framework with full coverage of risks and transparent and effective management, make explicit the responsibilities and limits of authority of the board of directors, board of supervisors and senior management, establish a risk management committee under the board of directors that is in charge of assessing systemic risk factors in the institution, clarifying the targets of systemic risk management, working out measures on risk prevention and control, and urging the senior management to perform relevant duties.
17. Risk management. SIFIs shall conduct consolidated risk management, carry out all-around and sustained management and control on the overall governance, capital, risks and financial conditions, keep optimizing risk preferences, establish a comprehensive risk management framework, and draw up, or update, and submit risk management plans and reports to the PBC and relevant regulatory authorities on a yearly basis. The risk management plan of SIFIs shall include a comprehensive analysis on the risk conditions, assessment on effectiveness of the risk prevention and control system and specific measures on improving risk management capability of the institution.
18. Information system. SIFIs are required to develop a highly efficient data collection and information system to realize effective monitoring on the overall risk conditions, constantly improve relevant information reporting mechanism, and reinforce information disclosure.
IV. Prudential Regulation
19. Routine supervision. The CBIRC and the CSRC conduct routine regulation on SIFIs in accordance with the law, which includes implementing market access management for an institution and its scope of business, reviewing the qualifications of or requirements for its senior executives, conducting on-site inspection and off-site regulation, collecting relevant regulatory data of the institution, carrying out risk and compliance assessments, setting up risk monitoring and control, assessment and early warning system, and investigating and punishing practices that violate laws and regulations in accordance with the law. The Ministry of Finance is responsible for the regulation of development banks, policy banks and their development and policy businesses in accordance with regulations.
20. Risk monitoring. The PBC, the CBIRC and the CSRC conduct regular risk assessment on the overall operations or specific business of institutions, require those institutions observe higher standards of information disclosure, and take other measures that can help monitor and analyze the risk conditions of institutions.
21. Stress test. The PBC, the CBIRC and the CSRC will carry out stress tests on SIFIs on a regular basis, and enforce additional regulatory requirements or corresponding regulatory measures on them in light of the stress test results.
22. Regulatory suggestions. The PBC can suggest relevant regulatory authorities carry out corresponding measures based on the risk judgments on SIFIs, and the regulatory authorities shall proactively adopt the suggestions and respond in time.
23. Macro prudential measures. Where any SIFI violates the prudential operation rules or threatens financial stability, the PBC can directly issue risk warnings to it. When necessary, the PBC can work with relevant authorities to propose suggestions on adjustments to the business structure, business strategies, and organizational structure of SIFIs in accordance with legal procedures, and facilitate their effective implementation to reduce the possibility of systemic risks. SIFIs shall rectify and reform as required, and submit reports to the PBC and relevant regulatory authorities.
V. Special Resolution Mechanism
24. Crisis management group. The PBC shall take the lead and set up a risk management group in collaboration with the CBIRC, the CSRC, the Ministry of Finance and other relevant authorities. The group is responsible for establishing special resolution mechanisms in SIFIs, promoting the formulation of recovery and resolution plans, and undertaking resolvability assessments, so that the operation failures of SIFIs can be safely, rapidly and effectively resolved, with their key businesses and services undisturbed and that systemic risks can be avoided.
25. Recovery plan. SIFIs shall draw up the recovery plan and update it on a yearly basis. The plan will come into effect after the review and revision by the crisis management group. It is aimed to ensure that in the extreme stress scenario, normal operations of SIFIs can be restored by taking relevant measures. The recovery plan includes but is not limited to organization overview, governance framework for the execution of the plan, identification of key functions and core businesses, design and analysis of stress scenarios, triggering conditions of recovery measures, specific implementation plan, feasibility analysis, impediments to execution and suggestions on improvement.
26. Resolution plan. The crisis management group will formulate the resolution plan and update it on a yearly basis jointly with SIFIs, and the plan will come into effect after the review and revision by the crisis management group. The resolution plan is set to ensure that institutions, when stuck in material financial difficulties or unable to carry on operations, can get rapid and orderly resolution while sustaining their key businesses and services with pre-specified resolution plan to avoid triggering systemic risk. The resolution plan includes but is not limited to organization overview, governance framework for the execution of the plan, identification of key functions and core businesses, triggering conditions of resolution measures, data and information required for the resolution plan, analysis of resolution strategies, analysis of resolution powers and tools, specific implementation plan, feasibility analysis, economic and financial impact of resolution, impediments to execution and suggestions on improvement.
27. Resolvability assessment. The crisis management group undertakes resolvability assessment on SIFIs on a yearly basis to evaluate the feasibility and credibility of the resolution mechanism, and aspects of improvement to raise resolvability. The assessment includes but is not limited to the following aspects: whether the resolution mechanism and instruments are legal and feasible, whether the sources for resolution funding and its arrangements are explicitly set out, whether the methodology for identifying the key functions of financial institutions is reasonable, whether the key functions can maintain operating in resolution, whether the organizational framework and management information system can support the resolution, whether the cross-border cooperation and information sharing arrangements are feasible, whether the infrastructure of the financial market can be constantly connected, and the economic and financial impact of the resolution. The crisis management group shall conduct timely assessment on the resolvability changes of SIFIs involved in significant changes such as mergers, acquisitions, and reorganizations.
28. Information reporting requirements. SIFIs shall provide the crisis management group with relevant information needed for the review of the recovery and resolution plans and assessment on the resolvability, to ensure that their management information system meets information reporting requirements in a quick and all-around manner.
29. Principles for resolution of problem institutions. When major risks occur in SIFIs, the PBC and relevant authorities will set up a risk resolution task force to cope with and resolve risks as approved. In the resolution process, resolution responsibilities shall be made explicit. The bottom line shall be held to guard against systemic risks. At the same time, the resolution shall observe the laws and regulations and prevent moral hazards. According to the recovery and resolution plans, regarding the sequence of using resolution funds, the assets owned by the financial institutions or fund raised through market-based channels shall be employed first as bail-in measures. When the above measures cannot resolve the risk, corresponding industrial insurance funds can provide liquidity support or aid in accordance with the law. And if neither measure can resolve the risk, SIFIs can apply to the PBC for emergency liquidity support or bail-out with prerequisites when the risk is possible to trigger systemic risk and threaten the stability of the financial system, and when necessary, the PBC will, together with related authorities, review the application, submit relevant documents for approval and put into force bail-out actions.
VI. International Coordination and Cooperation
30. Cooperation with international organizations. The PBC, the Ministry of Finance, the CBIRC and the CSRC enhance the exchanges and cooperation with international organizations such as the Financial Stability Board, the Basel Committee on Banking Supervision, the International Organization of Securities Commissions and the International Association of Insurance Supervisors, and steadily bring the regulatory framework for domestic SIFIs in line with international standard based on China’s national conditions. When a global SIFI is also identified as a domestic SIFI, the higher regulatory requirement of the two is applicable in principle.
31. Cooperation with overseas regulatory authorities. The PBC, the CBIRC and the CSRC keep improving the quality of cooperation with overseas regulatory authorities, intensify the regulation on the overseas subsidiaries of SIFIs, sign cross-border cooperation agreements with relevant authorities of host countries when necessary and enhance the coordination and cooperation in the process of regulation and resolution.
VII. Implementation
The Guidelines shall come into effect as of the date of promulgation.
Those ruled by specific regulations for financial holding companies shall be governed by the Guidelines as well if they are identified as systematic importance institutions by the FSDC.
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