Study On Effectiveness Of Bank Regulation And Supervision In China

After reviewing the history of bank regulation and supervision theories, it is clear to see that the theories of financial fragility, economics of regulation and economics of information based on macroeconomics theories from classical economics to Keynesian, mostly focus attention on "why we need regulation and supervision". In recent years,"how to regulate and supervise bank" are becoming hot issue in the research field and some scholars study bank regulation and supervision by empirical research and normative research. And then, the paper introduces the effectiveness of bank regulation and supervision with main deficiencies identified and focuses more intensely on suggestions and recommendations to improve the effectiveness of bank regulation and supervision in China.First of all, the paper studies the situation of bank regulation and supervision before considering the effectiveness of China bank regulation and supervision. Supervisory independence in China is actually fairly good although it is still low in the world rankings. After efforts in many years, accountability system and supervisory transparency has been constantly enhanced and there has been a slight improvement in supervisors’integrity at work. Cooperation is also broadly developed with other domestic financial supervisors and foreign supervisors in the bank sector. In addition, the paper summed up principles, techniques and effectiveness of bank regulation and supervision in China from the following seven items:capital adequacy supervision, credit risk supervision, operational and market risk supervision, corporate governance and internal control supervision, market access administration, establishment of banking supervisory information database, on-site examinations or inspections and off-site review.Although the situation of bank regulation and supervision in China is getting better, it is well aware that there is still room for improvement in following seven areas. Firstly, supervisory effectiveness of market entry in the bank sector remains to be improved. The supervisors have not enough independence and authority to examine and approve the market entry of commercial banks and their branches and also lack systematic and consistent examination and approval with respect to the new banking business. Issuing licenses is not closely followed by ongoing supervision. Secondly, the prudential supervision remains to be strengthened with respect to credit risk, market risk, operational risk etc.. Thirdly, there are still some problems in on-site examinations or inspections and off-site review and ongoing supervision remains to be improved. Fourthly, banking supervisors need to enhance the cooperation and coordination with other domestic financial supervisors. Fifthly, the laws and regulations framework of bank supervisions remain to be improved. Sixthly, cooperation with foreign supervisors needs to be strengthened. Finally, the external environment of effective banking supervision needs sound and sustainable macroeconomic policy, perfect public financial infrastructure, effective market discipline, the program to efficiently and effectively deal with problems faced by banks and appropriately systematic protection.When the above problems are concerned, the paper gives suggestions and recommendations in the following three areas to improve the effectiveness of bank regulation and supervisions in China.First, general environment of effective banking supervisions should be built in line with national situation. Effective supervisory system in the bank sector depends on some external factors beyond administration of bank supervisors, but has a direct effect on effectiveness of bank regulation and supervision. As a developing country in transition, external environment is an important factor that restricts the effectiveness of bank regulation and supervision in China. In order to enhance effectiveness of bank regulation and supervisions, the external environment need to be improved. On the one hand, establishment of macroeconomic environment and policy that is favorable to banking system should be expedited. On the other hand, to improve public financial infrastructure, it is important to expedite establishment of financial legality, promote research and implementation of accounting standards and international financial reporting standards, improve coordination and cooperation on regulation and supervision in the bank sector and establish system of scientific appointment in the bank sector. In addition, scientifically financial safety net with three basic factors of deposit insurance systems, prudential supervision and lender of last resort should be built. Development of effective deposit insurance systems is the top priority in the present stage.Second, scientific supervision concept and supervision governance framework should be developed congruous with national situation. Concerning the development of banking system and supervisory character in the present stage, the paper focuses attention on implementation of effective supervision in the following five areas. Firstly, Supervisors should change the role from leader or guider to whips or server and create a sound external supervisory environment. Secondly, with an open idea, supervisors face the development and enterprising of banks and consider to set up Examination of Supervisory Regulations Commission and Deficiencies Identification Commission in supervisory system. Thirdly,"supervision guided by more principles" should include market entry, rules and regulations related to market entry supervision, on-site examinations or inspections and conversation of prudential supervision etc.. Fourthly, the relationship between compliance supervision and risk supervision are neither opposite nor high or low level. They represent two aspects and overlap and mutual complement。Therefore, supervisors need positively implement the above two kinds of supervisions. Finally, it is important to form an idea of consistent regulation and supervision. Regulations and requirements are formulated based on essential characters and risky classification of kinds of financial institutions and financial activities.Third, effective implement of supervision should be developed in line with national situation. After development of proper supervision concept, how to establish effectively supervisory implementation system becomes concerned in the next step. The practice of bank regulation and supervision in developed countries shows that supervisory standardization is the only way to implement the correct concept of bank regulation and supervision. We can see that from the following five aspects. In order to establish and improve bank regulatory and supervisory framework, it is important to further strengthen accountability system, enhance banking supervisory transparency by disclosure of supervisory information and strength of supervisory cooperation and improve integrity of supervisors at work. Effective ongoing supervisory system should be built with an emphasis to persist on periodical ongoing supervision, confirm the model of market entry supervision and improve on-site examinations or inspections and off-site review. And then it is necessary to establish an elastic system of risky correct to improve effectiveness of supervision. In addition, risk-based supervision approach needs to be strengthened, especially with respect to the improvement of risk assessment system and fully usage of results of risk assessment. Finally, post assessment of supervisory effectiveness should be developed by setting up strictly post assessment program in the regulation for market entry, on-site examination or inspection, off-site review and administration penalty, which contributes to improve the effectiveness of bank regulation and supervision.