Bank Regulation and Supervision4—The regulation of Commercial Banks in China

This is the end of my blog, so I want to talk about the regulation of the commercial banks in my country.

When I had an internship in Industrial and Commercial Bank of China, a lot of things impressed me. For instance, helping an arrogant client to inventory and deposit 600,000 pounds-in cash.

But I do find out some measure of regulation in China. Some are quite similar with which are carried out worldwide.

The first one is deposit insurance, which is very common. For banks, compared to the way of direct financing, bank loans solve the problem of free ride for banks. But for their clients, they still worry about the issue of asymmetric information. So at this time, what the government should do is to recover the public confident and protect the clients. One of the most effective measures is, of course, deposit insurance. The first institution that established deposit insurance is Federal Deposit Insurance Corporation of USA (FDIC).

The second way is the limitation to capital and asset. As for the asset, the government limits banks holding highly risky asset, for example stocks, and encourage banks to diversify their investment. As for capital, government requires banks to meet the capital adequacy ratio, which reflects whether the operation of bank is “healthy” or not.

The third is to regulate the quality of assets. The second one, which listed above is a traditional way and is improved by this one. I find out that today, most of countries use CAMEL system. C-capital, A-asset, M-management, E-Earning, L-liquidity.

The last one I think is to prevent excessive competition. In China, there are a lot of commercial banks, some of them I even did not hear them before. So government prevent them to engage in excessive competition because this will lead them to pursuit profit so that they will seek for some highly profit but highly risky project.

That’s the end of my blog. As a blog, some of the article should be short, but I will add some in my presentation, so expect for it!!

Bank Regulation and Supervision3--The Cost of Bank Regulation

Banking is a highly regulated industry because of its high operation risk. So obviously, some cost of regulatory requirement must be incurred. It always costly for banks. 

There are many types of cost of regulation, and the very important two types are opportunity cost and operation cost.

As the opportunity cost, which is very common and easily understood, means the cost that banks must abandon some profitable activities that are beyond the regulatory requirements. Some activities, such as mortgages or loans, maybe highly profit but also highly risky. So they are not welcomed by the regulatory provisions. Banks may hate the legislative committee because they make them lose a large potential gain.

For operation cost, it arises from operating the regulation. According to the Gregory Elliehausen(1998), for example, such cost like material which used to report to customers or government, or the cost which need to spend to meet such regulatory requirement. And the operation cost also can be separated in two parts: start-up cost and ongoing cost. The costs that arise from making some deployment of the agency to meet the requirement are start-up cost which is one-time. The ongoing cost is the cost, which incurred from preforming the regulatory provision.[1]

But how we measure the cost of regulation? There are two ways, which are used very often. Collecting data and econometric method. Collecting data requires relevant members to question bank staff about the cost. But because of Asymmetric information, this way is less efficient. Some researchers use econometric method such as model to deal with the cost. However, as is known to all, it is very hard to choose the factors.

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1.Gregory Elliehausen，The Cost of Bank Regulation: A Review of Evidence, Bulletin, April 1998.

Bank Regulation and Supervision 2-------Basel Committee

Bank Regulation and Supervision 2-------Basel Committee

Yesterday is Valentine Day. So first, happy Valentine everyone!!

Anyway, today I want to say something about Basel Committee.

Basel Committee is an abbreviated form of Basel Committee on Bank Supervision. It was established by Group of Ten at the end of 1974. So what is Group of Ten? The Group of Ten is made up of 8 countries which are participated in IMF, Belgium, Canada, France, Italy, Japan, the Netherlands, the United Kingdom, and the United States,and other two central banks of German and Sweden. Basel Committee is also a formal institution of Bank for International Settlement，which can be written as BIS. Its website is http://www.bis.org/bcbs.[i]

The purpose of Basel Committee is to exchange the information of every country’s regulatory arrangement, to improve the effectiveness of the international banking supervisory techniques，to set the minimum standards of capital adequacy ratio, and to study the effectiveness of establishing standards in other areas.

Let us say something about Basel Accord. Basel Accord is an Agreement on a unified international bank capital calculation and capital standards. It has Basel Accord 1, Basel Accord 2, and Basel Accord 3. The first accord was established in 1975, which was quite simple. It emphasizes two points: First, any foreign institutions of banks cannot escape regulation. Second, it stated clearly about shared responsibilities of home and host countries. The second accord makes a substantial modification to the Basel Accord 1. It points out three basic foothold：Minimum Capital Requirements, Supervisory Review Process, and Market Discipline. In 2010, Basel Committee announced that they had reached an agreement on the content of Basel III. In Basel III, some requirements of leverage ratio, flow leverage ratio, and etc. have been raised in order to reduce the liquidity risk of banks’ system and strengthen the ability to resist the financial crises.

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[i] http://www.bis.org/bcbs/about.htm

Bank Regulation and Supervision 1-What and Why

Every month I get my bank statement. Every month I go to bank to deal with some affairs of my account at average three times. Understandably, bank is an essential part of human life nowadays.

When I read some materials related to the topic that I interested in, I find, in some researchers’ opinion, bank is so vital that it matter for human’s welfare and accounts for economic growth.[1]

In our lecture notes-topic four, bank regulation and supervision is defined as a government intervention. It requires banks to act in certain principles, disciplines and even laws.

For some investment activities, they have more risk but more profits. So some banks may tend to engage in this kind of investments. For example, invest in real estate or issue great loans to those firms and individuals, which are not well operated or do not have good creditor. Hope we all remembered the banking crisis not long ago. Some evidences show that in developing countries, the cost of banking crises has exceeded 1 trillion Dollars since 1980. [2]This maybe one of the reasons why bank regulation and supervision is worth discussing.

Another reason may be some banks will come together to be a syndicate if without some restrictions. They will monopoly the market, which do harm to the competition and efficiency. More seriously, if they collude with some political parties, they will be too powerful to control. It will cause a disaster not only for people but also for banks.

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[1] R. Levine, "Finance and Growth: Theory and Evidence," NBER Working Paper No. 10766, September 2004, and Handbook of Economic Growth, Philippe Aghion and Steven Durlauf eds., forthcoming.

[2] J. Barth, G. Caprio, and R. Levine, Rethinking Bank Regulation: Till Angels Govern, Cambridge University Press, forthcoming.