A Study On Change From Micro-prudential Supervision To Macro-prudential Supervision

Since US financial crisis，the main economies and international organizationshave realized that micro-prudential supervision proved to be unable to preventsystemic risk，thereafter，macro-prudential supervision has become important tasks offinancial supervision reform in most countries，which aims to prevent systemic risk.G20has adopted macro-prudential supervision into global financial supervisionmodel; Financial Stability Board (FSB）has become a macro-prudential supervisioninternational organization to maintain global financial stability; US has signed WallStreet Reform and consumer Protection Act of2009; European Commission hasestablished European Systemic Risk Bank (ESRB); Basel Ⅲ Agreement finally comeinto existence; all these signaled the transition of banking supervision from purelymicro-prudential supervision to “macro-micro prudential supervision”.Strengthening macro-prudential supervision has also raised highly emphasis ofChinese financial management. The People’s Bank of China has mentioned frequentlthat it is of critical importance to strengthen macro-prudential supervision，to keepfinancial system stable，to prevent systemic risk.Against such background， this paper is to explore the framework ofmacro-prudential supervision suitable to China，through comparing the causes ofmicro-prudential supervision’s failure to defend s stemic risk and the effectiveness ofmacro-prudential supervision.Firstly，this paper has reviewed the theories and practices on banking supervision，as well as the theoretical frame of systemic risk. The reason why micro-prudentialsupervision has not prevented systemic risk has been discussed. According tomicro-prudential supervision，if each bank is well supervised，the risk of each bank iscontrolled，and the whole banking system will be safe. But，this belief ignored thecontagiousness and interdependence between banks. Even under strictmicro-prudential supervision，the interdependent relationship could still lead to thearbitrage behavior，in the meantime，the positive feedback mechanism which existedbetween the operation of banks to the monetary policy leads to the pro-cyclicality。The outburst of US subprime crisis has proved this feature. Secondly，the effectiveness of macro-prudential supervision to prevent systemicrisk is studied in this paper. Due to the lack of micro-prudential supervision onsystemic risk，macro-prudential supervision is put forwarded in order to keep financestable. This paper has discussed the reasonability and necessity of macro-prudentialsupervision to prevent systemic risk， established a common framework formacro-prudential supervision.At last，this paper has given policy suggestions for China government toimplement Basel Ⅲ. While China planned to execute Basel Ⅱ in2011，Basel Banksupervision commission published Basel Ⅲ，and in August2011，China published“Commercial Bank Capital Management Act”(Draft). This paper has studied how tolearn from Basel Ⅲ and build up the framework of macro-prudential supervisionsuitable to China situation.