Chinese banks should set up an independent risk management system in line with its strategic expansion plan as part of efforts to ward off financial risks, China's banking regulator said Wednesday.

The breakout of the global financial crisis highlighted the necessity of increasing management of differentiated sovereign risks, the China Banking Regulatory Commission said in a guideline published on its website.

Just as Chinese banks were expanding throughout the world, the overseas risks they were facing were on the rise, the guideline noted.

Sovereign risks refer to ones that banks are exposed to when overseas borrowers or debtors are unable to repay debt because of their countries' economic, political and social changes.

Chinese lenders were required to differentiate risks according to the countries involved and make policies on the minimum potential loan loss provisions ranging from 0.5 percent to 50 percent, according to the guideline.

The banks must meet the requirements under the guideline by June 1, 2011.

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