China’s large number of small and medium-sized banks with total assets accounting for one quarter of the banking industry are very different from national commercial banks in terms of ownership structure and shareholder nature. According to the analysis of available financial report data, the ownership structure of small and medium-sized banks, especially rural small and medium-sized banks, is very decentralized and complex, the nature of shareholders and industry background are diverse, and private enterprises hold the majority equity. The current situation and characteristics of shareholders’ equity of small and medium-sized banks make the shortcomings and deficiencies of corporate governance more prominent, which leads to potential financial risks. In recent years, financial risk events of small and medium-sized banks have occurred from time to time, and the problems of shareholders’ equity and corporate governance behind them have become prominent. For this, the regulatory authorities have significantly strengthened their supervision.
I. Basic information of shareholders’ equity of small and medium-sized banks
China has a large number of small and medium-sized banks, with total assets of nearly 90 trillion yuan, accounting for about one quarter of the total assets of banking financial institutions. According to the data of China Banking and Insurance Regulatory Commission, by the end of 2020, Bank Of China Limited(601988) financial institutions had 22 types of legal person institutions, totaling 4604. In terms of quantity, small and medium-sized banks account for the vast majority, including 133 urban commercial banks and 3885 rural banking financial institutions (mainly including 1539 rural commercial banks, 27 rural cooperative banks, 641 rural credit cooperatives, 1637 rural banks and 41 rural mutual fund cooperatives). In terms of asset scale, by the end of June 2021, the total assets of China’s urban commercial banks were 43.64 trillion yuan, accounting for 12.99% of the total assets of banking financial institutions; The total assets of rural financial institutions are 44.33 trillion yuan, accounting for 13.19% of the total assets of banking financial institutions. Taken together, the total assets of urban commercial banks and rural financial institutions are 88 trillion yuan, accounting for 26% of the total assets of banking financial institutions.
A large number of small and medium-sized banks show great differences in the ownership structure. On the whole, the ownership is very scattered, the concentration is not high, the ownership structure is complex, the nature of shareholders and industry background are diverse, and private enterprises hold the majority equity.
from the perspective of equity concentration, the equity of small and medium-sized banks is decentralized.
The latest financial report shows that without considering the land stock link, among the listed urban commercial banks, the shareholding proportion of the largest shareholder is up to 20%, and the shareholding proportion of the top ten shareholders is up to 75%; The highest shareholding ratio of the largest shareholder in the listed agricultural and commercial bank is 9%, and the highest shareholding ratio of the top ten shareholders is 60%. Gf Securities Co.Ltd(000776) according to the analysis of the ownership structure of 507 non listed banks that disclose financial report data, the average shareholding proportion of the largest shareholder of 104 urban commercial banks is 19.6%, and most of them are less than 20%, and the average shareholding proportion of the top ten shareholders is 70.7%; The average shareholding ratio of the largest shareholder of 368 rural commercial banks is 9.4%, the average shareholding ratio of the top ten shareholders is 44.0%, and the shareholding ratio of the top ten shareholders of 69% of rural commercial banks is less than 50%.
The problem of equity dispersion of small and medium-sized rural banks is more prominent. In August 2020, Zhu Shumin, then member of the Party committee and vice chairman of the China Banking and Insurance Regulatory Commission, wrote an article “promoting the construction of corporate governance of rural small and medium-sized banks by deepening reform”, which said that one of the major characteristics of rural small and medium-sized banks is the large number of shareholders and very scattered shareholding. According to the disclosed data, there are more than 4.4 million shareholders in rural small and medium-sized banks, of which 99% are natural person shareholders. On average, there are 1948 shareholders in a single institution and 80000 shareholders in individual institutions.
from the perspective of the nature of shareholders, urban commercial banks are mainly local finance or state-owned enterprises, and rural small and medium-sized banks are mainly private enterprises.
Due to historical evolution and endowment factors, there are great differences in the attribute structure of the largest shareholder of small and medium-sized banks, mainly as follows: the largest shareholder of urban commercial banks is local finance or local state-owned enterprises, while rural commercial banks are mostly private enterprises. In the development and evolution of urban commercial banks, local finance is the main part of the capital invested by urban commercial banks at the beginning of their establishment, and has been in a dominant position for a long time. Since then, all localities have increased the introduction of external investors, and the shareholding proportion of local governments has decreased. However, at present, the largest shareholder of most urban commercial banks is still local finance or local state-owned enterprises. At the initial stage of the establishment of rural commercial banks, most of the shareholders were transformed from the original shareholders of rural credit cooperatives. There were many individual shareholders, and the largest shareholder was mostly private enterprises.
The ownership structure data of 507 non listed banks show that about 70% of the largest shareholders of rural commercial banks are private enterprises. The research from China Industrial Securities Co.Ltd(601377) also shows similar conclusions. Taking the nature of the largest shareholder as an example, the proportion of Chinese legal persons in urban commercial banks is about 70%, mainly municipal legal persons, and the proportion of private shareholders in rural commercial banks is about 73%, mainly local enterprises. From the perspective of the nature of shareholders, the proportion of private shareholders of rural commercial banks is higher than that of urban commercial banks. In fact, most of the equity of rural small and medium-sized banks is held by private capital.
According to the data disclosed by Zhu Shumin, private capital accounted for 84% of the equity of small and medium-sized rural banks.
from the perspective of shareholder industry background, the industry involved by the largest shareholder of small and medium-sized banks is relatively extensive and scattered. The proportion of the largest shareholder of rural commercial banks with financial industry background is relatively high, and the proportion of local finance in urban commercial banks is relatively high.
The ownership structure data of 507 non listed banks show that the largest shareholder of urban commercial banks is local finance, accounting for the highest proportion (17%), followed by Finance (14%) and construction (14%). Rural commercial banks generally have more cross shareholdings. The largest shareholder is the financial industry, accounting for the highest proportion (25%), followed by manufacturing (18%) and wholesale and retail (13%). In addition, the data also shows that the largest shareholder of 8% of non listed banks (41) is real estate enterprises, including 4 urban commercial banks (accounting for 4%) and 37 rural commercial banks (accounting for 10%).
In addition, China Industrial Securities Co.Ltd(601377) research shows that by the end of 2017, among the 134 urban commercial banks, 34% of the top three shareholders included urban investment entities and 16% included real estate enterprises. Considering the decentralized equity of rural commercial banks and the 418 debt issuing rural commercial banks with complete equity information, the proportion of the top five shareholders including urban investment entities is 21%, and the proportion of rural commercial banks including real estate enterprises is 40%. From the perspective of cross shareholding of small and medium-sized banks, the proportion of mutual shareholding of rural commercial banks is larger.
II. The supervision on the equity of shareholders of small and medium-sized banks has been significantly strengthened
In recent years, risk events of small and medium-sized banks in China have occurred from time to time. On the surface, it is a problem of non-standard bank operation and insufficient risk management ability, but on the deep level, it is mostly a problem of corporate governance. On May 24, 2019, the subcontractor bank was jointly taken over by the people’s Bank of China and the China Banking and Insurance Regulatory Commission due to serious credit risk. This major event in China’s financial development history reflects the painful lesson of corporate governance failure. In fact, in recent years, many high-risk small and medium-sized banks in China either have the problem that the company has not established a governance check and balance mechanism, or are arbitrarily controlled by the controlling shareholders.
The current situation and characteristics of shareholders’ equity of small and medium-sized banks, especially rural small and medium-sized banks, are easier to highlight the shortcomings and deficiencies of corporate governance, and then lead to hidden financial risks.
On the one hand, due to the large number of minority shareholders, scattered shareholding and weak voice, the operation and management of institutions is easy to be controlled by senior executives and a few key people; On the other hand, minority shareholders have impure motives and improper interest demands. They control institutions and directly manipulate operations through improper means such as equity holding, drawer agreement or concealing related relationships. Individual shareholders even illegally and wantonly withdraw bank funds, turning the bank into their own “ATM”. In addition, problems such as mismatching the performance ability of governance subjects, lack of scientific and clear strategic positioning, and external intervention also exist widely.
Zeng Gang, deputy director of the national finance and development laboratory, said that in terms of system and mechanism construction, small and medium-sized banks still have some defects, and the deficiencies in corporate governance are reflected in many aspects. First of all, some small and medium-sized bank governance institutions are “similar in shape and separated from God”, and the supervision and balance mechanism is a mere formality. Secondly, the shareholders of some small and medium-sized banks are mixed. The motivation of individual major shareholders to take shares in small and medium-sized banks is impure. After taking shares, they ignore the regulatory rules, and the phenomenon of offside disorder is serious. Third, there are some distortions in the corporate governance of rural banking institutions. The problems between the administrative management system of the Provincial Association and the corporate governance of rural commercial banks have become increasingly prominent, which has become an important institutional factor perplexing the development of rural credit institutions. It is urgent to further promote the reform of the Provincial Association.
On November 12, 2021, the China Banking and Insurance Regulatory Commission (CIRC) issued the general situation of the evaluation results of corporate governance supervision of banking and insurance institutions in 2021. A total of 1857 institutions participated in the evaluation, including 1673 commercial banks and 184 insurance institutions. The evaluation results show that in recent years, driven by supervision, the corporate governance awareness of the banking and insurance industry has gradually improved, and the construction and reform of corporate governance have achieved certain results, but there are still some problems that can not be ignored: the Party leadership and Party Construction of some institutions have been weakened, and the pre research of the Party committee has not been implemented in place; The phenomenon of false capital of shareholders, illegal equity holding on behalf of shareholders and illegal intervention of major shareholders is still serious in some institutions; The operation of the board of directors is not standardized, the independence and effectiveness of directors are insufficient, and the failure of internal checks and balances and supervision still exists in some institutions; Insufficient information disclosure and inadequate protection of stakeholders’ rights and interests are still common.
On December 10, 2021, the CBRC disclosed the list of 15 major illegal shareholders, which is the fourth time the CBRC has disclosed the list of major illegal shareholders since July 2020. Up to now, the China Banking and Insurance Regulatory Commission has disclosed the list of 81 major illegal shareholders, involving 7 urban commercial banks, 9 rural financial institutions, 3 insurance companies, 2 financial leasing companies, 2 trusts, 1 auto finance company and 1 finance company. The 81 shareholders disclosed by the China Banking and Insurance Regulatory Commission were involved in 17 types of illegal acts.
From 2018 to 2020, in order to thoroughly implement the decision and deployment of the CPC Central Committee and the State Council on improving the corporate governance of financial institutions, the cbcirc systematically organized and carried out the “three-year investigation and rectification action of shareholders’ equity of rural small and medium-sized banks”. Within three years, 3898 rural small and medium-sized banks have completed institutional self-examination and regulatory inspection. The three-year investigation and rectification involved 385000 shareholders holding more than 1% and 388.9 billion shares, and 19900 problems were found in total. The problems found by the CBRC in this round of investigation mainly include five aspects: unqualified shareholder qualification; The source of capital for shares is not in conformity with the regulations; Evade “penetration” supervision and hold equity in excess of proportion and quantity; Carrying out related party transactions in violation of regulations; Equity pledge is not bound, etc.
With the increasing attention paid to the issue of shareholders’ equity and corporate governance, China’s financial regulatory authorities have continued to strengthen relevant supervision in recent years. Since 2018, the regulatory authorities have issued more intensive policy documents related to equity and corporate governance than before, and successively issued a series of measures and regulations on equity management of financial institutions, related party transactions, improving corporate governance, performance of directors and supervisors, management measures for behavior of major shareholders, qualification of senior executives and so on. In addition, it has also established a regulatory and evaluation mechanism for the corporate governance of banking and insurance institutions, as well as a normalization mechanism for disclosing major illegal shareholders, and carried out three-year investigation and rectification actions for the equity of shareholders of small and medium-sized rural banks. The introduction of these policies and the implementation of rectification actions have played a promoting role in improving the corporate governance level of small and medium-sized banks, and the rectification of some key issues has achieved phased results. However, the situation facing the reform of corporate governance of Bank Of China Limited(601988) institutions is still complex and severe. In the future, supervision will be further strengthened in accelerating the revision of laws and regulations, refining and improving supervision rules, strengthening inspection and law enforcement, and increasing the cost of violations by institutions and individuals.
