Closer regulatory scrutiny will boost financial stability

By Ping Xinqiao Source:Global Times Published: 2017/7/24 19:58:40

Illustration: Peter C. Espina/GT


Although China's financial risks are generally controllable at this stage, there is still the possibility of systemic financial crisis. As institutions with high leverage ratio, banks' own funds always constitute less than 10 percent of their assets, which shows that the banks and the enterprises are totally different. The most important difference between banks and enterprises is that the proprietorship of the enterprises occupies the major proportion of their assets, while proprietorship is a very small part of the assets of banks. Therefore the essence of the banks is to carry and allocate the risk. In such circumstances, if we keep issuing excessive loans, attaching little importance to shadow banks and failing to establish an integrated supervision system covering different financial industries, the risks of the banks will increase drastically. These risks will also spread to various industries of the country, raising the possibility of a systematic financial crisis. Sadly, some people involved in the banking industry are ignoring this point.

At present, the country faces financial risks. In the current asset structure of banks in China, the proportion of credit is very high, especially loans to real estate. This means that there may be bad debts, and the loans may not be fully recovered. In addition, with the development of Internet finance in recent years, hybrid operation and cross-business operation has emerged on a large scale. The market situation has become chaotic. Shadow banking, as an arbitrage behavior, has drilled loopholes in the fragmented supervision system and is actually a challenge for banking supervision. In the recent years, our country has been making efforts in de-leveraging, and although some people have different opinions, I think that is a right move. We have been bearing the risks for so many years and we have seen the possibility of the crisis, so it is inevitable and right for us to reduce the risks.

In the past 20 years, China has had a fragmented supervision system. Under this institutional regulation system, which means that the regulators for securities, banks and insurance were mainly in charge of their own industries, specialized regulators have to coordinate with each other on the trans-sectoral financial activities. However, if financial regulation relies heavily on institutional regulation, the functional regulation will be alienated and distorted. For instance, once the banks are in charge of shadow banking, other non-bank financial institutions will not monitor the shadow banking that much, which actually has led to a neglect of potential problems. Besides, if the supervision is institutional, it will be difficult to eliminate the root of the crisis that lies within the institutions themselves. Institutional channels are very important channels. Like in 2008, the loosening of controls by the Federal Reserve on re-lending conditions, emergence of shadow banks amid financial innovation, disguised manipulation of bank's requirements of capital adequacy ratio, loose monetary policy and expectations of government guarantees - all of these contributed to the outbreak of the financial crisis. The crisis is a powerful evidence that large risks can be accumulated by institutional channels.

In accordance with the recently held National Financial Work Conference, the establishment of a financial stability and development committee at the level of the State Council will strengthen the links between finance and real economy. Raising financial supervision to such a high level highlights the country's attention to financial risks and its wish for financial stability. The committee will not only be capable of mobilizing the resources from the one bank and three commissions, but also from the entity sectors to close the loopholes in financial regulation. With such determination and support, China's financial regulation will be optimized to a new level and China's financial stability will be further strengthened.

The author is a professor with the School of Economics at Peking University.


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