A draft law on banking supervision was passed by China's top legislature Saturday, clearing the legal status of the newly-found bank watchdog, the China Banking Regulatory Commission (CBRC).

The draft amendments to the Law on the People's Bank of China and the Law on Commercial Banks were also passed at the sixth session of the National People's Congress (NPC) Standing Committee, which ended Saturday.

Under the new law, the CBRC is authorized to oversee all banks and financial institutions in China, investigate illegal banking operations, and mete out punishments for violations of the law.

The CBRC was founded in April this year, to replace the function of the People's Bank of China (PBOC), the central bank, as the country's banking watchdog.

The new law has introduced some of the Basle Core Principles for Effective Banking Supervision, internationally-accepted rules for banking supervision put forward by the Basle Committee on Banking Supervision.

Commercial banks are required to strictly follow the guidelines to minimize financial risks set by laws and regulations or by the bank watchdog in line with laws, the new law stipulates.

Experts here said the law signals the shift of the country's supervision policy on banks from simply monitoring the legitimacy of operations to putting equal importance on both legitimacy and risk control.

The CBRC has launched a series of actions to control banking risks this year, including tracking the non-performing loans of commercial banks and probing the non-credit operations of the four state-owned commercial banks.

"The new law is a practical one, designed to meet the needs of the operations of the CBRC after absorbing the long-term experience of the central bank's supervision of banks and international rules," said Zhang Xiao, a member of the NPC Standing Committee.

The other two major banking laws were amended to bring them into line with the new law, whereas more attention was attracted by the amendment to items relevant to non-banking businesses of banks.

The amendment to the Law on the People's Bank of China added an item saying that the State Council will set up a coordination mechanism for the financial sector.

China's banking, securities and insurance industries are supervised by three watchdogs -- the China Banking Regulatory Commission (CBRC), the China Securities Regulatory Commission (CSRC) and the China Insurance Regulatory Commission (CIRC),
respectively.

"A good and effective coordination mechanism among the watchdogs will be critical, since the integration of different businesses in the finance sector is an ongoing trend," said Yi Xianrong, an economist at the Institute of Finance under the Chinese Academy of Social Sciences.

The amendment to the Law on Commercial Banks has left room for the possibility of banks dabbling in non-banking financial businesses.

Commercial banks are forbidden to engage in trust and securities businesses, or invest in non-banking financial institutions or enterprises in violation of government regulations, the amendment says.

Before being amended, the law had absolutely banned commercial banks from engaging in non-banking businesses such as securities, insurance and trust services.

Laws have to impose rigid regulation upon banks which wish to engage in non-banking financial businesses, since the supervision mechanism is not yet in place, said Jiang Qiangui, vice-chairwoman of the NPC Law Committee.

The amendment to the Law on the People's Bank of China also highlighted the central bank's performance in monetary policy management.

The currency policy committee, a consulting arm under the PBOC, is urged by the amendment to "play an important role in steering the country's macro-economy, especially its currency policy."

The central bank will organize steps to crack down on money laundering across the country, and coordinate the relevant government departments in this regard -- tasks formerly undertaken by the Ministry of Public Security -- according to the amendment.

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