China's banking regulator is working on a guideline for supervision of cross financial operations of banking institutions, such as those in insurance and securities sectors, to identify hidden risks in the financial system, said Jiang Dingzhi, vice chairman of the China Banking Regulatory Commission (CBRC) on Thursday.

Chinese commercial banks have been setting up or purchasing trust companies, leasing firms, insurance and securities brokers in recent years to expand and diversify their businesses.

"We are trying to avoid risks resulting from the lack of supervision over the emerging umbrella bank groups, which have subsidiaries in insurance and securities businesses," said Jiang at the International Finance Forum in Beijing.

Diversified services in such banking groups have helped improve the competitiveness of banks and their risk control capabilities, but new risks came along as well, Jiang said.

Lack of transparency within the banking group, for instance, had made it possible to transfer assets and risks among different subsidiaries and the parent company due to absence of supervision.

"The US sub-prime crisis overshadowing the US and global markets was one example of hidden risks," he said.

The new regulation aims to realize a concentrated supervision of banking groups as a whole, by putting all of their subsidiary business operations under supervision, Jiang said.

In the present system Chinese banking institutions, securities companies and insurance firms were separately supervised by independent regulators: the CBRC, the China Securities Regulatory Commission (CSRC), and the China Insurance Regulatory Commission (CIRC).

In its draft guideline published by the CBRC on its website to solicit public opinion with deadline on November 16, the commission encourages the parent company to consult with other regulatory bodies, including the CSRC and CIRC, on risks and capital adequacy ratio of its subsidiaries.

The draft also says parent bank groups should deduct investment in their subsidiary securities and insurance companies from their balance sheets, or achieve a consolidated balance sheet for the group as a whole in other ways.