Establishing And Strengthening Internal Control System Of China's Commercial Banks

The financial control system of China's commercial banks is a dynamic process andmechanism, aiming at realizing business objectives through the establishment andimplementation of a series of regulations, procedures and practices on finance risksafeguarding, monitoring and addressing. A sound internal control system of commercialbanks is essential for the micro-basis of China's finance security guarantee system, for theanswering to Basle Agreement and international economy integration, and for the smoothdevelopment of China's commercial banks as individual entities. In the history ofinternational finance, there emerged such theories as "Financial Instability Hypothesis","Theory of Financial Fragility", and "Theory of Internal Fluctuation" etc. Nevertheless, it isInformation Economics that has sought the root of financial fragility: information asymmetry,Prisoners' Dilemma and assets degradation. Out of these theories and financial practices, theinternal control theory of commercial banks develops gradually. Chronologically, the theoryof internal control can be divided into four phases: the sprouting period (before the 1940s),the rudimentary period (1940s—1970s), the maturing period (1980s—1990s) and thechanging period (after 1990s).The most authoritative theory on internal control is Frameworkof Bank Internal Control System issued by Basle Committee in January, 1998, the core ofwhich is the routinization of internal control, effective supervision and objective evaluation ofthe internal control system. In the respect of bank internal control practices, Germany'suniversal banks, USA's bank business division and other developed countries' bankingsystems are all good examples for China. However, the internal control system construction ofChina's commercial banks must confront the difficulties of imperfect control environment,blocked information and communication systems and lax power check mechanisms.Moreover, China's internal control system construction should be based on the reality: stateownership of major commercial banks, current hierarchy of general bank and its branches,and macro-finance control orientation, etc. Therefore, the framework of the internal controlsystem of China's commercial banks should be a complex of vertical control, horizontalcontrol and mutual feedback in which the management is supervised, a better "controlculture" is created, capacity for identifying and evaluating risks is improved, control andsupervision is separated from other businesses, information and communication is assured,bank businesses are better monitored, and self-discipline of extra-balance and derivativebusinesses is emphasized. Besides, for the health of the internal control system of China'scommercial banks, modernized enterprise system should be established in state-ownedcommercial banks, and external monitoring and industry self-discipline should be reinforced. This essay consists of three parts. Part One presents a basic summarization on the internalcontrols of commercial banks. First, it expounds the meaning, principles and characteristics ofinternal control; Second, it analyzes the necessity to establish a sound internal control systemin domestic commercial banking. Finally, it introduces theories of both foreign and domesticbanking management and makes a comparison between them. In the respect of domesticbanking control theory, it emphasizes on the inherent hypothesis of financial risks and internalcontrol guidance, On the foreign part, it stresses on the internal theory and ideas defined in" Basle System". This part deals also with the successful experience of developed countries ininternal control practices. Part Two analyzes mainly the current situation and existing problems of commercialbanks in China. First, it reviews briefly the history of internal control in China's commercialbanks; Secondly, it analyzes the current situation of China's commercial banks andemphasizes further on the restrictive factors for the establishment of internal control system inChina and then tries to sort out t...