The Management Of Legal Risk By Chinese Commercial Banks In Carbon Financial

Chinese commercial banks took participant the market of carbon financial from2005, which the Industrial Bank announced to become the first “Equator Banks” inChina. However, due to the ability of commercial banks and the problems of carbonfinancial market, commercial banks are still at the initial stage of development ofcarbon financial business. Those commercial banks have provided two kinds ofcarbon financial services, credit financing services and some intermediary services.According to Basle Committee on Banking Supervision (“BCBS”), legal risk ofcommercial bank, as part of a firm-wide definition of operational risk should beconsidered into the management of minimum capital requirements, either the businessof carbon financial market. Legal risk of carbon financial services is the risk of loss toa commercial bank which is primarily caused by:1. change in law; or2.administrative intervention by government; or3. a defective transaction; or4. lawapplying clause and jurisdiction; or5. quality of professionals. Considering themanagement of legal risk basically throughout all aspects of the daily operation andmanagement of operational risks on commercial banks, the management of legal riskshould be consistent with the management of operational risk as a whole, either on thecarbon financial services.In order to improve the business in carbon financial market and control theirlegal risk, commercial banks started to establish regulatory systems to manage legalrisk with assistance of government departments, banking self-regulatory associations,and independent institutions. Government departments could release positive policy,enact related regulations to build carbon financial market. Banking self-regulatoryassociations should guide and organize the enactment or formulation of norms andstandards for the management of legal risk on carbon financial services. Independent institutions could provide databases and other kinds professional services to assist thecommercial banks establishing the scientific management system.The internal organization of commercial banks is necessary to establish theregulatory management system, including the board of directors, senior managers, andthe legal/compliance departments. The board of directors approves the plan of themanagement legal risks on carbon financial services. Senior managers, as a coremanagement layer on the management system, make decisions on management planson carbon finance services. Legal or compliance department is the main executivebody of doing specific legal risk strategies with assistance of relevant departmentsunder the control of senior managers. The purpose of building organizations is todesign scientific management systems to control legal risks on carbon finance servicebusiness. According to suggestions from BSBC and factors of legal risks of carbonfinance services, legal risk management can be broken down into the component partsof identification, assessment, monitoring and control/mitigation.