The Study On The Effectiveness Of The Supervision On Rural Small And Medium-Sized Financial Institutions And Its Evaluation Methodology

The rural small and medium-sized financial institutions have always been theweak link of China’s financial supervision system for their numerous quantities,abroad distribution and frail fundament. Aiming to stabilize the rural financial market,to enable the rural financial system to fully play the role of supporting the“three-dimensional rural issues concerning agriculture, countryside and farmers” andcounty economy, the effectiveness of the supervision on rural small and medium-sizedfinancial institutions must be improved. This thesis focuses on the strategicdevelopment of China’s rural and county finance for now and the future periodregarding to the regulation progress and present status, and systematically studies theeffectiveness of the supervision on rural small and medium-sized financial institutionsand its evaluation methodology. Through the study, the relevant inspirations areobtained and some countermeasures and suggestions on how to increase the supervisioneffectiveness are provided.Following the venation of finance theory and the finance industry development,combining the financial supervision evolution processes with the relationship betweeneconomic growth and financial development, it elaborates the necessity of financialdevelopment and financial supervision. Besides, by explaining related theories on dualeconomy structure and rural finance, it explores the theoretical bases for evaluating thesupervision effectiveness on rural small and medium-sized financial institutions.Comparing with other financial institutions, rural small and medium-sizedfinancial institutions are very special. This specialty is not only caused by theirhistorical evolution processes and present status, but also because its service objectsare related with “three-dimensional rural issues” and county economy, whichdetermines their natural difference on supervision objectives. These objectives consistof promoting rural financial institutions sustainably and stably serve for the countyeconomy, ensuring the security of rural financial institutions, preventing systemic riskof rural financial markets, appropriately introducing the competition mechanism intorural financial market and subsequently realizing the aforementioned objectives withminimal costs. The fundamental intensions of the supervision effectiveness on ruralsmall and medium-sized financial institutions include their support extent andstrength on “three-dimensional rural issues” and county economy, the degree of decreasing asymmetric information, the extent of their operational stability, the effectof the motivation and the restraint of the supervision and thus the expenses ofsupervision institution to fulfill the supervision objectives.China’s supervision evolution on rural small and medium-sized financialinstitutions approximately experiences four stages which are the early quietismsupervision in the planned economy period, then the strict supervision on initial stageof the reform and opening up, following the loose supervision in the1990s and fornowadays prudential supervision advocated by the China Banking RegulatoryCommission. Till now, there still exist a few vague knowledge and fallaciousphenomenon about the supervision philosophy and practices on these rural institutions,such as focusing finite supervision resources and attention on risk management whichshows one-sidedness Main problems existing in the rural small and medium-sizedfinancial institutions supervision system include the unclear supervision objectives;the severe information asymmetry between regulators and regulated agencies; theunconscionable operational mechanism of rural small and medium-sized financialinstitutions; the lack of competition in rural financial markets; over easingsupervision restraint cost of these small agencies; insufficient supervision resources;the disappearance of the policy support on perfecting the risk condition and so on. Allof the above problems restrict the supervision effectiveness on rural small andmedium-sized financial institutions.In order to achieve the supervision objectives on rural small and medium-sizedfinancial institutions, it is obliged to accomplish the innovation on supervision mode,system and methods based on the existing practical problems. The new balancedsupervision mode of “cooperative supervision” is defined as to balance betweenoriented supervision, risk supervision, mechanism supervision and cost management.Under the circumstance of China’s dual economy structure, the “cooperativesupervision” is a mode which suits for supervising the disadvantaged rural small andmedium-sized financial institutions rooted in relatively underdeveloped counties. Theoriented supervision is applied to solve the problems of the regulated that serve forcounty economy and “three-dimensional rural issues”. The risk supervision aims todeal with the security issue of the regulated and the prevention of the regionalsystemic risk. The mechanism supervision is used for improving the competitionmechanism and corporate governance structure for the regulated. Finally the costmanagement is applied for solving the problems on the irrational usage of supervisionagency funds. In addition, the innovations on supervision system and methods could provide great convenience for the above-mentioned supervision practice and costmanagement and also establish the efficient incentive mechanism and restraint systemso that the efficiency can be increased and the problem of lacking sufficient resourcesfor supervision on rural small and medium-sized financial institutions can be solved.By using the designed indicator system and real data to do comprehensiveevaluation on the supervision effectiveness, it is found that the too strongrisk-appetite supervision goes against the achievement of supervision objectives onrural small and medium-sized financial institutions. Therefore, the “cooperativesupervision” concept should be brought into the evaluation process on rural financialsupervision effectiveness. Signed from the evaluation results under differentfirst-class indicators weights, the supervision effectiveness on rural small andmedium-sized financial institutions is reasonably stable which means the orientedsupervision, risk supervision, mechanism supervision and cost managementcomplement and promote each other. If these four perspectives are managedconsistently and implemented in place, the rural small and medium-sized financialinstitutions would perform in good and steady condition, at the same time, ruralfinancial markets are dynamic and vigorous and four first-class indicators obtain veryhigh marks. On the contrary, only one-side supervision score could hardly do anybenefit for increasing the supervision effectiveness on rural financial institutionsunder the position of ineffective or even noneffective supervision. Therefore, basedon the supervision objectives on rural small and medium-sized financial institutions,the equally-weighted comprehensive evaluation method on supervision effectivenessis applicable and the most incentive and constrained way.According to the empirical results, from the perspective of positive influence, for themoment the supervision rating affects the realization of supervision objectives the most,then off-site supervision ranks the second with the site supervision following While themarket access system has very limited impact on the realization of supervision objectives,the supervision disposition doesn’t affect the goals obviously. The empirical results alsoverify that current supervision on rural financial institutions is the risk-preference type. Inorder to implement the “cooperative supervision” on rural small and medium-sizedfinancial institutions and improve the supervision effectiveness, appropriate supervisionpolicies and mechanisms should be formulated...