China's banking regulator has demanded that two new commercial banking candidates enlist foreign investors as founding shareholders, in a move that could set tougher corporate governance market entry hurdles for newcomers.
Bohai Bank and Zhejiang Commercial Bank, which are both applying to become regional commercial banks, will also be required by the China Banking Regulatory Commission (CBRC) to put in place controls over related-party transactions and to contain relevant risks.
Related-party loans advanced to major shareholders are a key area of concern for regulators and investors who fear banks could easily become captive lenders to major shareholders.
In the mainland, banks are banned from advancing loans of more than 10 per cent of their net capital to a single borrower. At one stage, Huaxia Bank extended as much as 40 per cent of its net capital to its controlling shareholder.
According to a CBRC statement made yesterday, the pair should also do away with government interference in their day-to-day operations and adopt mechanisms that can efficiently manage capital and risk-management controls.
Generally, local governments like to wield influence on commercial city banks set up in their jurisdiction.
Both banks also needed to be 'innovative' in coming up with a corporate governance regime, the CBRC said.