. capital accord ii particularly calls for strengthened identification and assessment of risks by the banks themselves, which means each bank should be able to conduct internal risk rating on each category of assets according to its own historical or realistic data. this is what we call “ internal rating based approach ( irb ) ”. such a practice has already been adopted by some chinese banks. for example, some banks have conducted assessment of credit risks based on classifications of the borrowers. some based their risk rating on the business size of the borrowing enterprises while others referred to the ownership structure of the borrowers in deciding the risk profiles. what i would like to stress here is that classification of risk profiles by geographical regions also has profound significance. theoretically speaking, in a country where capital freely moves without any restrictions, there might not be a visible difference in respect of credit risks across different regions, and we have actually seen this situation in many countries. however, in a big country like china, such a regional risk difference is relatively distinct since many of china ’ s provinces are even larger than some of the countries in the world. on the other side, capital has not been able to move freely within china in the transition process from the centralized planning system to the market economic system, which indicates risk differences across the regions could not be neglected. several years ago when the regional risk difference was at its high level, the npl ratio in the regions with worst risk profiles could be 10 times higher than that in the regions boasting the best risk performance. some experts have made many studies on the reasons behind such a regional difference in terms of financial risks, which could be summarized as follows. first, different degrees of intervention in banking business by the local governments have contributed to regional financial risk difference. second, different performance of the judiciary system and law enforcement across the regions has led to different protections for the rights of the creditors and support for the financial institutions. for the four asset management companies established in 1999 to speed up the disposal of non - performing assets in the commercial banks, they need support from the judiciary and law enforcement departments in each region in the process of asset recovery. however, due to the difference in support they received from these departments, the recovery ratio of even the same category of assets posed sharp difference among different regions. third, commercial culture has developed in different ways across the regions. though only a temporary phenomenon by nature, cronyism or nepotism once heavily penetrated commercial activities in certain regions, contributing to the high

human resource consulting on 40 multi - national companies ( mncs ) in shanghai in november 2003 indicated employee development program ( 78 % ), reward and acknowledgement ( 60 % ), compensation and welfare ( 56 % ) and training program ( 40 % ) were among the top 4 appealing factors. the economist, mr. liang xiaomin, in his recent presentation about culture in the shanxi merchants, also pointed out that draft banks by shanxi merchants in the 19th century designed the arrangement of “ career stock ” according to each employee ’ s position, tenure and performance. the stock could share dividends. the arrangement played apparent incentive role in that period. since 1920s, there were more and more mergers and acquisitions in a horizontal, vertical and mixed manner and even across borders, bringing about several times the super - banks. after china institutes its exit mechanism for financial institutions, acquisitions, restructuring and bankruptcy will surface as well. under such circumstances, it is of high necessity to establish social safety net for employees and to make proper arrangements for employees ’ medical and unemployment and pension insurance. we shall establish effective incentive and restraint mechanism. we shall gradually establish the market of professional managers. the situation shall be changed where some operational performance and reputation mechanism are the important determinants for compensation of top management in the market and within the enterprises. government agencies are after all government agencies, and enterprises are after all enterprises. there shall no longer be an incentive mode based on “ administrative hierarchy ”. in no event shall executives of top management with poor performance be transferred to posts at the same administrative levels or back to posts in administrative agencies. professional managers shall cherish their own reputation and get over the complex of “ administrative hierarchy ”. for top management of banks, we shall have incentive compensation. more important, we shall cultivate expectation linked with future operational earnings, e. g. stock option, long - term incentives like big pension plan for long tenure, practice practical protection of property safety and personal dignity for top management for their hard - working after retirement. strong incentives shall be accompanied by strict restraint. we shall form the responsibility mechanism, by means of supervisor inquiry, proposal for recall, establishment of track records of top management and investigation and affixation of responsibility. in the recent revision of the corporate law, lessons have been drawn from the practice of “ lifting the veil of the corporations ” and constructive proposal has been put forward regarding “ supervisor proceedings ” and “ shareholder proceedings ”. for damaging behavior by directors and top management