Home Page/Public Lecture Series/Rebuild the Financial Regulatory Body: Values, Functions, and Models Xiao Qin
Rebuild the Financial Regulatory Body: Values, Functions, and Models Xiao Qin
Author： Source： Date：2016-07-20
On July 14, 2016, Mr. Xiao Qin, Member of the Financial Services Development Council and former Chairperson of the China Merchants Group, visited Shenzhen Innovation and Development Institute (SZIDI) and delivered a speech titled “Rebuild the Financial Regulatory Body: Values, Functions, and Models”. He pointed out that major developed countries have begun to fill in the gap between macroeconomic policies and micro-level prudent regulations after the subprime mortgage crisis. “Under the special circumstances in China, macro-level prudential supervisions suggested to be introduced to the financial regulatory framework, using the model of “Central Bank + Financial Conduct Authority”
Distinct limitations of the “One Bank Three Commissions” model – individual regulatory frameworks for each industry
Qin said, while individual regulatory frameworks for each industry were incrementally developed since the Reform and Opening-Up, the limitations of the “One Bank Three Commissions” model is increasingly evident with the rapid expansion of the capital market and the finance sector, especially under the trend of financial conglomeration. For one, the model is detrimental to financial stability due to its incompetency in preventing systematic risks; for another, it reduces the regulatory efficiency and increases the management costs, with a low degree of coordination among regulatory bodies.
“Regulatory bodies are charged with the responsibility to regulate the sector, but they are also asked to promote the development of the industry. Their administrative power, political future, and authority largely depend upon their sizes and states of development. Therefore, they are constantly contradicting each other, with conflicting policies overlapping each other. At the same time, a fragmented management framework shattered financial statistics into pieces with no global datasets, hindering the risks identification efforts, let alone providing potential responses,” said Qin.
Qin argued, there exists a staggering gap in financial holding companies’ regulations, protection of investors’ and consumers’ rights, as well as shadow banking, innovative banking and internet banking, “For example, innovative lending platforms like P2P are regulated by local financial entities, taking advantage of the loopholes in regulations. In addition, the lack of regulations among the shadow banking industries covers up the reality of defections in the banking system, which in turn may result in miscalculations of systematic risks in the financial sector.
Relying on micro-level prudent regulations may elicit financial crises
Qin observed a varying level of reforms and remedies implemented within the financial regulatory framework among developed countries, after they re-evaluated their micro-level prudent regulations. “First, macro-level prudent regulations should be strengthened to fill the gap between macroeconomic policies and micro-level prudent regulations; second, functional and behavioral regulations should be encouraged.” Qin pointed out that virtually every country is emphasizing macro-level prudent regulations, and institutionally fill the gap between macroeconomic policies and micro-level prudent regulations.
“Micro-level prudent regulations do not concern how banks fulfill the capital adequacy ratio, they can inject capital, raise funds, or sell their debts. However, if a massive number of banks simultaneously perform these actions, market liquidity may be drained and that can elicit systematic risks,” Qin believed that while financial entities can retain their liquidity level by selling its assets and deleveraging during external crises, and its guarantee of solvency does accord with the requirements of the micro-level prudent regulations, these actions may result in financial crises.
Qin emphasized that micro-level and macro-level prudent regulations could not replace each other, “Technically, macro-level prudent regulations are additional capital requirements that were founded on micro-level prudent regulations, or some form of given deductions. Marco-level prudent regulations directly regulate the behaviors of financial entities through capital requirements, enabling a direct response to credit cycles and pricing bubbles, and effectively safeguarding financial stability.
So, which regulatory model suits China better? Qin pointed out that the United States has established the Financial Stability Oversight Council to facilitate top-level synergies, while Britain has overhauled its financial regulatory framework by adapting the “Central Bank + Financial Conduct Authority” model, which is more suitable for China. “With the special environment of China, financial entities and businesses [regulations] should be centralized in the central bank, which acts as an integrated regulatory institution. The reform can be divided into two steps, with the first step being a strengthened regulatory coordination. The central bank would take over the oversight for systematically critical financial entities. A transitional arrangement can be made with a “One Bank Two Commission” model or a Financial Coordination Commission as the starting point. The second step would be to actualize functional and behavioral regulations, by building them on fully-established macro-level prudent regulations.”
Distinct limitations of the “One Bank Three Commissions” model – individual regulatory frameworks for each industry
Qin said, while individual regulatory frameworks for each industry were incrementally developed since the Reform and Opening-Up, the limitations of the “One Bank Three Commissions” model is increasingly evident with the rapid expansion of the capital market and the finance sector, especially under the trend of financial conglomeration. For one, the model is detrimental to financial stability due to its incompetency in preventing systematic risks; for another, it reduces the regulatory efficiency and increases the management costs, with a low degree of coordination among regulatory bodies.
“Regulatory bodies are charged with the responsibility to regulate the sector, but they are also asked to promote the development of the industry. Their administrative power, political future, and authority largely depend upon their sizes and states of development. Therefore, they are constantly contradicting each other, with conflicting policies overlapping each other. At the same time, a fragmented management framework shattered financial statistics into pieces with no global datasets, hindering the risks identification efforts, let alone providing potential responses,” said Qin.
Qin argued, there exists a staggering gap in financial holding companies’ regulations, protection of investors’ and consumers’ rights, as well as shadow banking, innovative banking and internet banking, “For example, innovative lending platforms like P2P are regulated by local financial entities, taking advantage of the loopholes in regulations. In addition, the lack of regulations among the shadow banking industries covers up the reality of defections in the banking system, which in turn may result in miscalculations of systematic risks in the financial sector.
Relying on micro-level prudent regulations may elicit financial crises
Qin observed a varying level of reforms and remedies implemented within the financial regulatory framework among developed countries, after they re-evaluated their micro-level prudent regulations. “First, macro-level prudent regulations should be strengthened to fill the gap between macroeconomic policies and micro-level prudent regulations; second, functional and behavioral regulations should be encouraged.” Qin pointed out that virtually every country is emphasizing macro-level prudent regulations, and institutionally fill the gap between macroeconomic policies and micro-level prudent regulations.
“Micro-level prudent regulations do not concern how banks fulfill the capital adequacy ratio, they can inject capital, raise funds, or sell their debts. However, if a massive number of banks simultaneously perform these actions, market liquidity may be drained and that can elicit systematic risks,” Qin believed that while financial entities can retain their liquidity level by selling its assets and deleveraging during external crises, and its guarantee of solvency does accord with the requirements of the micro-level prudent regulations, these actions may result in financial crises.
Qin emphasized that micro-level and macro-level prudent regulations could not replace each other, “Technically, macro-level prudent regulations are additional capital requirements that were founded on micro-level prudent regulations, or some form of given deductions. Marco-level prudent regulations directly regulate the behaviors of financial entities through capital requirements, enabling a direct response to credit cycles and pricing bubbles, and effectively safeguarding financial stability.
So, which regulatory model suits China better? Qin pointed out that the United States has established the Financial Stability Oversight Council to facilitate top-level synergies, while Britain has overhauled its financial regulatory framework by adapting the “Central Bank + Financial Conduct Authority” model, which is more suitable for China. “With the special environment of China, financial entities and businesses [regulations] should be centralized in the central bank, which acts as an integrated regulatory institution. The reform can be divided into two steps, with the first step being a strengthened regulatory coordination. The central bank would take over the oversight for systematically critical financial entities. A transitional arrangement can be made with a “One Bank Two Commission” model or a Financial Coordination Commission as the starting point. The second step would be to actualize functional and behavioral regulations, by building them on fully-established macro-level prudent regulations.”
