OREANDA-NEWS.  The announcement last week that the Communist Party of China's Central Commission for Discipline Inspection (CCDI) would be conducting an inspection tour of China's largest banks and financial regulatory authorities underscores broader challenges the country's banks face with governance, management and political risks, says Fitch Ratings.

The detention of Agricultural Bank of China's (ABC) president and vice-chairman by the CCDI - as reported in local and international media - highlights the potential risks large Chinese banks could face amid the broader investigation. The executive's detention follows corruption investigations at China Minsheng Bank and Bank of Beijing earlier in the year.

There is no indication if the ABC executive's detention and the CCDI's inspection tour will result in further investigations at China's other large lenders. That said, Fitch maintains that investigations of individuals, including senior officers of a bank, are unlikely to have a major effect on entities' ratings.

Chinese banks' Viability Ratings (VRs) are already sub-investment grade and factor in a certain degree of weak corporate governance and management effectiveness. Fitch's VRs for China's banks range from 'bb' to 'b' with each of the Big 4 banks' - ABC, Bank of China, China Construction Bank, and Industrial and Commercial Bank of China - at 'bb'. Moreover, the influence of management is viewed as low relative to other factors, such as the operating environment, asset quality and capitalisation/leverage.

The investigation of both the large banks and China's regulatory agencies also underscores potential weaknesses in the regulatory framework for financial institutions. Senior banking officials in China tend to rotate between regulatory bodies and financial institutions, which raises questions about the independence of the regulators and standards of prudential oversight.

The review could be positive from a credit perspective if it leads to strengthening governance standards and increased transparency in individual banks and for the banking system as a whole. The review may also lead to more conservative approaches and strategies by some banks, which would improve stability at a time when the operating environment has become increasingly challenging amid a broader macroeconomic slowdown.

However, significantly stronger governance and greater transparency in the banking sector would require improvements throughout the system, from the government down to individual banks, and it is not clear if the ongoing investigation tour has such a substantive scope.