The Strength of Commercial Banks Depends on That of Its Board of Directors

2007-11-8

　　Another condition to implement the system of business departments is that CMBC has a very strong management accounting system. This system had been recommended at the end of 2004. Its important functions are: to define borders for each business; how to calculate in a transaction; how to check each employee’s achievement; how the profits in foreground, middle ground and background are realized and distributed. This management accounting system lays a foundation for the recommendation of the system of business departments. Otherwise, when you propose to establish business departments, how can we internally divide accounts? How can we calculate? How can we check achievements? And how can we harmonize processes?

　　Therefore, as to matters in connection with process bank, I think we have considered everything we can consider, and then we will execute them step by step.

21st Century: When the reform about the system of business departments is completed, CMBC's branches and sub-branches will only conduct retail business and have no right to loan, just like a business department of a securities company, won’t them?

Dong Wenbiao: The first revolution by CMBC in Chinese banking industry is that, presidents of branches and sub-branches have no authorization to conduct any business having risk opening, including loans. Any loan project shall be decided by an independent examination system in the headquarters. One reason to do so is that more than 95% of risks and non-performing loans in Chinese banking industry derive from branches, so branches shall not conduct risk business at all.

　　To manage operation risks of branches, CMBC has made some revolutions, one of which is the concentration of background business. For example, when a new account is opened, the subsidiary bank can only make entry. 80% of businesses are dealt with in four managing centers in the headquarters, 15% in branches, and sub-branches only deal with 5%, all of which are cash businesses. Cash business has low risk and can be easily controlled. This is the first point; Secondly, we stipulate that, when a transaction is dealt with in the foreground, all factors are separately handled: you record the account name, and he records the account entry. Such pipelining has no possibility of collusion. This is the reason why no operation risk takes place in CMBC till now.

21st Century: You said that in the future, CMBC will divert itself from operating interest margin to risks. Would you explain the meaning of operation risk?

Dong Wenbiao: There is no foreign bank which only earns a few interest margins as Chinese banks do. Three years before, CMBC participated in a project of ship finance with a comprehensive return rate of 6%, while the rate realized by another foreign bank amounted to 15%. The customer said that the service provided by such foreign bank is good, and they were also happy even if high charges should be paid. In fact, they just provide specialized service by specialized personnel through specialized channels.

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