Research On Legal System Of Public Funds Bailout On Problem Banks

In September 1997, "Core Principles for Effective Banking Supervision" legislated by Basel Committee on Banking Supervision points out that establishing market exit legal system for banks is an indispensable part of establishing effective financial system. In order to keep pace with the development trend of international banking and combined with the development process of China's financial industry, China's State Council proposed to establish a sound financial institutions' market exit (bankruptcy) legal system in "Views of Deepening Economic Reform" of 2005. Soon after the proposal, China Banking Regulatory Commission started to draft "Banking Financial Institutions Bankruptcy Regulation". The draft regulation is at present basically completed. Unfortunately, except for takeover and reorganization, the draft regulation doesn't mention any other bailout measures. Status quo indicates that China doesn't pay enough attention to problem bank public funds bailout than bank bankruptcy.Problem bank bankruptcy and bailout are "twin brothers" essentially. Problem bank bailout legal system should be established at the same time with problem bank bankruptcy legal system. Problem bank bailout legal system is unnecessary for ordinary enterprise. However, bank is different with ordinary enterprise. Under the threat of systemic risk, problem bank bailout legal system, especially public funds bailout legal system which play the key role in bailout, is indispensable.Public funds bailout is the most important measure in all measures of problem bank bailout. There are two reasons for this:the first, public funds bailout is the most effective measure; the second and more importantly, almost all the controversial issues in the course of problem bank bailout are related with public funds bailout. In other words, as long as the problem bank bailouts involve public funds, all the controversial issues appear. The controversial issues include:first, bailout may lead to greater moral hazard; second, monetization of financial risk leads to inflation; third, fiscalization of financial risk leads to financial deficit; fourth, injury of legitimate rights of taxpayers.Study in depth of legal systems of public funds bailout on problem banks has important theoretical and practical significance. In theory, it helps make up bank bailout theory which was long neglected in bank bankruptcy theory; in practice, it solves a series of controversial issues related with problem bank bailout together, which makes problem bank public funds bailout become legally and more reasonably.The legal nature and legislative model of public funds bailout are the theoretical premises of public funds bailout legal system. The former determines the legislative concept; the latter determines the framework of public funds bailout legal system and the formulation of legal rules. The basic framework of public funds bailout legal system can be expressed as:it's a public funds bailout system which is composed of "Unified Legislation" and "Dispersive Legislation", power's "Procedure Control" and "Entity Control", "Specific Rules" and "Abstract Rules". Dispersive legislation includes central bank public funds bailout legal system, deposit insurance institution public funds bailout legal system and the Ministry of Finance public funds bailout legal system. Unified Legislation includes distribution of power and coordination.The study of Dispersive Legislation of public funds bailout legal system is carried out by bailout subjects, which is central bank, deposit insurance institution and the Ministry of Finance. Dispersive Legislation aims to regulate bailout subjects'power. In the course of public funds bailout, central bank aids problem banks on the standard of "Systematic Risk", by means of "Lender of Last Resort". Central bank is "the first shield" to prevent bank's bankruptcy. Deposit insurance institution takes over problem banks lacking of liquidity. Deposit insurance institution aids problem banks on the principle of "Least Cost Test", on the standard of "Systemic Risk Exception", by means of "Open Bank Assistance". Deposit insurance institution is "the second shield" to prevent bank's bankruptcy. The Ministry of Finance aids problem banks on the principle of "Costs Recyclable", in the concept of "Protection of Taxpayers", by means of share acquisition and troubled assets purchase. The Ministry of Finance is "the last shield" to prevent bank's bankruptcy.The study of Unified Legislation of public funds bailout legal system is carried out by distribution of power and coordination. "Distribution of Power and Coordination Law of Problem Bank Public Funds Bailout" should be legislated, which aims to coordinate public funds bailout legal system of each bailout subject. Public funds bailout should be systematized for utility maximization. China should learn from the United States and gradually establish public funds bailout system of our own through legislation. In this system, Banking Regulatory Commission is the center of information; central bank, deposit insurance institution and the Ministry of Finance are bailout subjects; the power of central bank, deposit insurance institution and the Ministry of Finance should be clear and the three agencies should collaborate with each other.