| Commercial banks, as a special category of enterprises featured in risk managementfor profit earning and daily operation, have suffered from great pressure since the pastfinancial crisis. On the one hand, a lot of material risks have not been systematicallyand effectively treated, thus as a consequence, causing the falling down of thebrand-named financial institutions such as Lehman Brothers Holding Inc. On theother hand, according to the requirements of the supervisory regulations, commercialbanks must obey the regulations issued by Basel commission and COSO. However,despite of its significant impact on the risk management and internal control practiceof the United States and even the world, the COSO report is currently in the processof revision as a countermeasure to its proven defects exhibited in the financial crisis.Meanwhile, The Basic Norms of Internal Control, which is consistent with COSO andreleased by the Ministry of Finance (MOF), China Banking Regulatory Commissionand other3major regulatory bodies, also covers the regulation of the commercialbanks. As a result, the Chinese commercial banks, subjected to the dual regulatorydemands of external supervisions, are now facing the enormous pressure and costs inimplementing both the Basel and the COSO systems. Thus, there is an urgent need tofind a way to integrate both of the regulatory systems.The objective of this study is to explore how to establish a system of internal controlin the Chinese commercial banks by integrating the requirements from both BASELand COSO systems. The study includes the exploration of the understanding of thebasic concepts such as uncertainty, target, chance and risk, and its cross-relations suchas chance management and risk management, corporate governance and internalcontrol, and the comparison between COSO and Basel system. In the study, thedefects of COSO system are identified. The enterprise-wide risk managementframework including internal control is proposed. The relationships, such as thosebetween the risk management, internal control and corporate governance as well asmanagement and its inadequateness/inappropriateness, are clarified.Recommendations to the COSO amendment are then proposed. Furthermore, the nature and characteristics of the commercial bank business as well as their impact onthe commercial bank’s internal control are analyzed. Finally, on the basis of therevised COSO system, principles of internal control of the commercial banks duringthe parallel implementation of both the COSO and the Basel systems are introduced.Case analysis method was used in the last part of the study to illustrate how to useCOSO internal control framework and ERM framework to analyze and evaluatesample business lines of branches from both the Bank of China and the ChinaConstruction Bank. Through this analysis, the feasibility of parallel implementation isverified.The methods used in this study include literature review, comparative analysis,questionnaire analysis, and case analysis.The novelty of the study includes:1. The coordination principle of parallel implementation of the COSO and Baselsystem is introduced. In particular, the Basel system is identified as a basis forimplementation, with the COSO system as a general guide and supplemental tool,especially on the sub-branches or lower levels, and in the area of operational riskmanagement.2. The enterprise-wide risk management framework, which is based on theclarification of the difference between control inadequateness/inappropriateness andrisk, is proposed. The relationships between the risk management, internal controland corporate governance are clarified. The internal control should be decomposedinto management control and risk control. The risk-effective principle, rather thancost-effective principle, is more suitable to the risk control.3. The prime issue to the integration of the COSO and Basel system is the integrationof the nature of risk in each system, and then the risk mapping. |
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