Financial Market Regulation and Reforms in Emerging Markets

5. What Regulatory Policies Work for Emerging Markets?

138 What Regulatory Policies Work for Emerging Markets? luo ping 5 This chapter discusses the banking regulatory and supervisory practices in China with reference to the international standard for banking supervision, namely, the Basel Core Principles for Effective Banking Supervision (BCPs).1 While China has incorporated many sound practices advocated by the BCPs, there are quite a few areas where significant differences can be observed with respect to qualification review of senior management, broader regulation at the product level, prescriptive rules, and guidance for risk management. The findings presented here are intended to further enhance the understanding of the international standard on banking supervision as well as its implementation in emerging markets. Based on this analysis, I argue that general principles and a principle-based approach to regulation do not seem to work well for emerging markets. Indeed, the current financial crisis has revealed some shortcomings in the existing international standards on banking supervision. Perhaps this standard can be improved by greater specificity and by incorporating more aspects of the experiences in emerging markets. Banking Sector Reform in China Banking sector reform is the most important part of financial sector reform in China. It started as early as 1978, when the monobank system was replaced with The views expressed in this paper are those of the author and do not reflect the views of the commission. 1. See Appendix 5A. regulatory policies for emerging markets 139 a multilayered system that separates commercial lending operations and central banking. However, the most recent major reform initiatives to improve the functioning of the banking sector and banking regulatory system started in late 2003 when, after the success in corporate sector reform, the government decided to recapitalize all the state-owned banks and establish the China Banking Regulatory Commission (CRBC), which is devoted exclusively to regulation and supervision of the banking industry. By this time, China had completed the process of introducing an institutional approach to financial regulation, while the central bank, the People’s Bank of China, continued to be responsible for monetary policy. The CBRC is fully committed to building up a strong and robust banking sector and an effective supervisory system. The bank restructuring over the years has been successful. At present the entire banking sector has restored its solvency, and banks have become financially sound and better managed financial institutions . A comparison of data from 2003 to 2008 reveals the remarkable change in the financial strength and resilience of the banking industry. Over this period, the total assets have increased by RMB 34.7 trillion, up 1.3 times; bank capital has increased by RMB 2.72 trillion, up 2.6 times; and profits have increased by RMB 521.8 billion, up seventeen times. The nonperforming loan ratio of major commercial banks was reduced by 15.5 percentage points, while the number of banks in compliance with the minimum capital requirement of 8 percent has increased from 8 to 204, with their assets accounting for 99.9 percent of the total banking assets. The average capital adequacy ratio is 12 percent for all commercial banks. On the regulatory and supervisory side, since its establishment the CBRC has benchmarked to international standards and sound practices in banking supervision and has worked hard to develop a clear roadmap for the future. In its early days the CBRC provided significant input into the drafting of the Law of the People’s Republic of China on Banking Regulation and Supervision (hereafter referred to as the Law), which was issued shortly after the CBRC began operation in late 2003. While recommending the Basel Core Principles for Effective Supervision as the most relevant framework for banking supervision, the CBRC helped to ensure that the Law clearly defines not only the objectives of banking supervision and the responsibilities of the banking supervisor but also detailed approaches to banking supervision. Indeed, over 50 percent of the provisions under the Law closely reflect various principles of the BCPs document.2 Moreover , the BCPs document is included as an appendix in the interpretation notes of the above Law, together with other relevant rules and regulations issued by the government, which is unprecedented in the rule-making process in China.3 2. The Law contains six chapters and fifty provisions. 3. People’s Republic of China (2004). 140 luo ping Although the BCPs have helped to significantly shape the banking...