Vertical Management, Well Defined Rights and Responsibilities, Clear Incentives and Disincentives

Han Fenglin, a former senior manager of the risk management department of the CCB headquarters with 19 years of credit management experience, formally took office as the risk director of CCB’s Zhejiang Ningbo branch on July 10, 2006. On the same day, there were another 36 risk directors of the bank’s provincial branches also took office. So far, all the risk directors selected by the bank’s headquarters for its provincial branches have taken post.

The direct appointment of risk directors by the headquarters for provincial banks is a major step of the bank’s risk management system reform as well as a creative initiative in the history of CCB. Those professional and young risk directors were selected from the business units throughout the bank and have rich working and management experience. About 95% of them were appointed to places other than their original working units.

Earlier the headquarters invited a number of well-know experts and scholars from the China Banking Regulatory Commission, the Bank of America and the Australia and New Zealand Banking Group as well as its own directors and supervisors to hold a 17-day training course for the incoming risk directors of provincial branches and teach them the risk management theories and methods of modern commercial banks.

To standardize the working procedures of risk directors and ensure their effective fulfillment of functions, CCB formulated the Working Procedures of Provincial Branch Risk Directors (Trial) in May this year, stipulating that under the leadership of the Chief Risk Officer of the headquarters the risk directors of provincial branches are responsible for the comprehensive risk management of provincial branches, including organizing, guiding, coordinating and supervising the risk management and credit examination and approval of the branches and developing and implementing risk management plans. The headquarters has made it clear that the risk directors must also be the director or standing deputy director of the risk management and internal control committee of the provincial branches.

In addition, the CCB headquarters enacted the Rules on the Performance Evaluation of Risk Directors of Provincial Branches (Trial) which was approved at the second meeting of the headquarters’ Risk Management and Internal Control Committee in 2006 in order to guarantee the realization of risk management objectives of the bank. The Rules prescribe that the performance evaluation results of risk directors are classified into grade A, B and C and serve as the major reference of the assessment, incentives and disincentives, authorization and compensation of risk directors.  

The vertical risk management system reform of CCB with the purpose of raising risk management capacity started in 2003 when the headquarters reorganized the risk management mechanism and established the risk management department taking charge of formulating risk management policies, standards and system throughout the bank. In 2005, the headquarters appointed risk directors to its Jiangsu, Hubei, Guangxi and Xiamen branches, initiated the vertical risk management model and accumulated valuable experiences in this regard. Today CCB is building the risk management system characterized by “vertical management and parallel operation” and clearly defines the risk management responsibilities of specific departments, posts and processes in order to meet market demands and further enhance risk management efficiency. In addition to accumulating its own experience, CCB is also learning from the advanced foreign risk management concepts and gradually developing the risk culture with unique values suitable for its long-term growth.

According to an official of CCB, the bank will take the opportunity of the reform to establish the basic framework of comprehensive risk management. It will try to initially build the risk management system as required by the New Basel Capital Accord in about three years and bring its risk management system in line with the New Basel Capital Accord in five years, especially developing a set of economic capital management system covering various risks such as credit, market and operational risks and bringing the credit risk measurement up to the standards of the Internal Rating-Based Approach.