Financial Crisis And Financial Supervision

As an important way of optimizing resource allocation, finance is the lubricant of modern economy. However, every now and then, financial crises hit, wipe out huge amount of paper wealth, seriously harm real economy, and aggravate unevenness of wealth distribution. Financial crises are defined as bank run and panic, wild price fluctuation of financial assets, and serious exchange rate instability. As a result,disequilibrium gets worse and worse, and asset price and exchange rate deviate further and further from equilibrium state until extreme overshooting.This paper, first of all, introduces six financial crises, happened in either England or/ and the United States at 1792, 1825, 1857, 1907, 1929, and 2007 respectively. They played a substantial role to shape modern financial system, because, as ad hoc response to financial crises, key architecture of modern finance like central banks, security exchange center and deposit insurance took shape out of these crises.This paper, then, separately analyzes three kinds of crises, which are bank crisis,debt crisis and currency crisis, from the perspective of causes, progressions,transmissions, and ways of avoidance. This paper holds that financial crisis is no more than these three kinds of crises or various combinations of them.This paper analyzes financial regulation with respect to necessity and feasibility,principles and focal points, and content of regulations. Financial market differs substantially from commodity market, although they share a great deal of market regularities. Therefore, financial market entails a different set of regulations, in order to avoid crisis, or ameliorate its impact.This paper finally explores China’s financial regulations. Our banking system has accumulated non-trivial amount of risk. Risks in area of real estate, debt and exchange rate should not be ignored as well. Luckily, cushioned with huge amount of GDP and exchange reserve, and bright economic future, China will not replicate Asian financial crisis of late 1990 s or US sub-prime crisis nearly ten years ago. Hence, these risks will be more likely to be channeled away through impact on growth prospective, and increased possibility of falling into “mid-income trap”. Only by delineating the boundary between government and market, fully harnessing the decisive role of market force inallocating resources, and establishing macro-prudential regulation under the leadership of the central bank, could China escape the destine of “mid-income trap” and financial crises.The role of market, which should be always respected and abided by, could not be emphasized more in this paper, and market is a good way to prevent risks from being accumulated. At the same time, due to the peculiarity of financial market, it should be closely regulated. Among others, economic cycles triggered by scientific and technological progresses, financial innovations, inherent fragility of financial system,and chronic international imbalance are leading causes of financial crises and hence should be vigilant against. Once in a full-brown financial crisis, market must be replaced by government and, according to so-call Powell Doctrine, formidable force should be deployed to save the core of the whole financial system, because the incidence of financial crisis means market is wrong in some way or some aspect, and let intact,market will inevitably lead to overshooting with dire consequences for the whole society.Resolute and decisive government actions can avoid overshooting and protracted readjustment.