Regulatory upgrade needed to deal with financial risks

Source:Global Times Published: 2018/5/22 21:53:41

Illustration: Luo Xuan/GT

Editor's Note:

Since the 19th National Congress of the Communist Party of China (CPC) last year, the pace of opening-up in China's financial sector has been even more rapid. On Saturday and Sunday, the 2018 Tsinghua PBCSF Global Finance Forum was held in Beijing, with the theme of "Financial Reform, Opening-Up and Stability in the New Era." Attendees at the forum offered their views on the impact of opening the financial sector, the direction of financial reforms, technology for financial infrastructure service and supervision, and measures for dealing with risks.

Zhou Xiaochuan, former governor of the People's Bank of China

After the global financial crisis erupted in 2008, the finance and policy circles looked at various ways to study the stability of the financial system.

Since the end of 2008, international organizations have gradually put forward the pro-cyclical issues in some economic systems, financial systems and financial markets, demanding the introduction of counter-cyclical measures. The most representative form that has finally emerged in this process is the macro-prudential policy framework.

After the gradual formulation and introduction of the macroprudential policy framework, the counter-cyclical adjustment requirements were further increased for global systemically important financial institutions (G-SIFIs). In 2015, the Total Loss Absorbing Capacity (TLAC) measures were introduced at the G20 summit.

All these measures are intended to enhance the system's counter-cyclicality. These methods of studying system stability actually used the knowledge and experience of other disciplines, including control theory and electronic engineering.

In the future, more consideration should be given to using continuous functions as a method of policy formulation and response.

The current regulations, especially the rules of the financial system, take an "all-or-none" approach. Some are divided into a few steps, using different steps to deal with different situations, but few of them use continuous functions.

In addition, the traditional methods of economics focus more on the univariate logical relationship, which emphasizes only one logical route, while in practice the occurrence of the financial crisis was certainly complex, so there may be a variety of variables that matter. Thus, vector analysis may be required and preferred.

Lu Lei, deputy director of the State Administration of Foreign Exchange

The current financial industry faces two major impacts: the impact of technology on the industry and the impact of the supply of financial factors on the overall real economy. The two types of impact have also formed a creative deconstruction of the traditional financing model and a destabilizing factor in the financial market while improving financing efficiency.

Regarding financial reform, there are three basic directions to take.

First, the consistency of standards must be the basic trend for market players and the market itself.

Second, innovation in behavioral supervision is the basic strategy for management system reform.

Third, the more technological progress there is, the more need there will be for a central counterparty clearing mechanism. The decentralized approach will lead to instability and liquidity risk.

In addition, the opening-up of the financial industry should focus on the construction of financial infrastructure. This, along with promoting global financial stability and enhancing liberalization and facilitation of trade and investment, will be important for our opening-up.

Dong Junfeng, president of NetsUnion Clearing Corporation

Regulatory technology can help reduce costs, improve efficiency and increase the health of the industry, so as to benefit the general public. Financial infrastructure can not only address issues such as privacy protection, malicious competition and conflicts of interest, but can also reduce the implementation cost by reusing existing infrastructure.

To build financial infrastructure, supervision technologies need to be adopted based on a centralized platform and market institutions. Also, there must be a firewall to prevent systemic financial risks and there should be a regulatory sandbox within the firewall.

In addition, the participation of financial infrastructure in the regulatory technology can be considered as a way to explore the combination of financial technology and regulatory technology.

Sun Guofeng, director of the Institute of Finance under the People's Bank of China

The essence of the global financial crisis was the creation of currency that over-supported the trading of assets, resulting in asset bubbles. The collapse of the bubble formed a systemic risk, and mixed operation is an important factor to consider.

Under the current banking credit and monetary system, banks have the impulse to expand excessively. Mixed operation makes it easier for banks to use money creation rights excessively, and it is more likely to bring systemic financial risks.

Therefore, the key to separating operations is to distinguish banks that can create money and non-bank financial institutions that cannot create money but can transfer money.

There are four risks in separating operations: opaque risk, moral hazard, regulatory arbitrage and investor protection. Therefore, it is necessary to establish an internal firewall to isolate risks and conduct supervision.


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