Study On Differentiated Regulatory System Of Village And Township Banks

Rapid development has been made in village and township banks, a financial instituition with Chinese characteristics since its first presence in Sichuan Yilong. As of end-2013,1071village and township banks commenced business across the country, holding a total of RMB628.9billion of asset. Village and township banks has become one of the fastest growing institutions in Chinese banking sector in recent years. Being an important financial innovation, village and township banks in China has made achievements that attracted worldwide attention. However, a number of drawbacks and problems have been gradulally revealed in recent years. Therefore, it is undoubtedly appropriate and necessary to review and re-examine problems of village and township banks from the perspective of supervisory and regulatory system against the backdrop of the impending marketization reform of interest rate, which will exert strong negative effects on small and medium-sized banks. The thesis intends to take a comprehensive view of the current development and paths of village and township banks from the vision of differentiated supervision of village and township banks as institutional innovation. On this basis, the paper proposes system design and suggestions about improvement of village and township banks regulation.The body of this thesis consists of introduction and six chapters.The introductory part discusses the main concern of the thesis:the justification for differentiated regulation of village and township banks and establishement of differentiated regulatory system under the existing unified regulatory framework. Problems stem from three aspects:the conflict between unified regulatory rules and the uniqueness of village and township banks, the equilibrium and conflict of diversified goals of the stability, efficiency and fairness of village and township banks regulation as well as the contradiction of the differences between eastern and western village and township banks'operating environment and unified supervision. By carding reseach of village and township banks home and abroad, the author finds out the research direction that is relatively weak and suitable to go to the core:the differentiated regulation of village and township banks.Chapter I retrospects and analyzes practises of rural financial institutions. It identifies the reasons for the dual structure of China's rural finance and its strengthening mechanism by carding the evolution of Chinese rural financial development and analyzing the status quo of Chinese rural financial system. It makes comparative analysis on constraints on Chineses rurual financial supply as well as demand. This chapter also discusses inefficient supply and derangement of supply and demand structure under the common action of these constraints. Thus, this chapter demonstrates why village and township banks are mainly oriented toward small farmers and rural micro-enterprise. Combining the rural finance development theory and prudential supervision theory, this chapter explains the particularity of rural financial regulation deriving from the distinctivenss of rural financial markets. Based on previous practical experience and theoretical summary, it explores how to dynamically select the appropriate government intervention, especially regulatory intervention policy and how to balance market failure and government regulation failure to the fullest extent. The thesis aims at provding theoretical foundation and overarching guidance system for the study of the subsequent differentiation of rural bank regulatory system design.The second chapter centers upon the empirical research and analysis on the regulation arrangement of village and township banks and their current situation. It reflects existing regulatory guidelines and related policies which are mostly unfavourable for the stable operation of village and township banks and the increase of the supply of rural finance. It also presents the inappropriatensss of the relative fiscal, monetary policies and policies related as well as the vaguenss of superversiory power allocation. Under such situation, the CBRC meets frustration in the process of promoting the newborn village and township banks to provide commercial financial support for agriculture. Taking the regulatory effect of36village and township banks in one of the pilot provinces(S province) as a sample, this chapter visually shows the conflict between village and township banks's deviation from market orientation and regulatory requirements with datas and charts for the first time. Chapter III makes in-depth analysis on the causes of deviation of regulatory target through the widely criticized and questioned phenomenon:village and township banks diverge from the market orientation. The author examines the reasons for "mission drift " of village and township banks with game theory mixed-equilibrium model,taking the deviation from village and township banks regulatory effect as instance. This chapter also challenges the assumption about village and township banks's grass-roots spirit and its self-consciousness of providing financial services to the rural areas in the framework of system design. It deconstructs goal conflict between regulation and the banks as well as the game of their behavior based on principal-agent model, pointing out the inappropriateness of regulatory standards setting and lack of regulatory resources. Therefore, supervisors are unable to change the phenomenon that limited individual rationality might lead to collective irrationality and unable to suppress opportunistic behavior of the banks.Chapter IV makes comparative study on business development and regulatory systems of U.S. community banks, micro-credit institutions in India and Latin American MFIs (micro-finance institutions), drawing on good practices and learning from lessons. The above-mentioned countries utilize targeted and differentiated regulatory system and upbuild mature legal system on the basis of collaborative innovation of supporting measures. For example, in order to promote the development of MFIs, they establish and perfect supporting regulatory, fiscal policy and monetary policies such as deposit insurance system as well as legal system warranty, so as to promote the equalization of financial services providing for disadvantaged groups. Smaller village and township banks are more similar to MFIs in Latin America while larger ones bear resemblance to community banks in the U.S. Therefore, most of the chapter addresses elaboration on these two different types of institutions and their supervisory approach. To be specific, the supervision of U.S. community banks emphasizes on the analysis on supervisory framework and differentiated supervisory policies. The supervision of MFIs in Latin American countries is focused on the design of regulatory indicators throughout the supervisory process and consideration of prudential supervision criteria. As Inida and China are both large agricultural and developing countries, MFIs in these two countries bear much resembalance. The micro-credit crisis, supervisory contradiciton and difficulties in India might provide prospective revelation for micro-credit companies transfomation into village and township banks.Chapter V demonstrates rationality analysis on differentiated supervision of village and township banks. Since these banks embody the attributes of microfinance, it is inappropriate to require their compliance with regulatory rules oriented towards traditional commercial banks. It is also inappropriate if regulators appraise the performance of village and township banks with a unified national regulatory standards by ignoring the fact that village and township banks have different business structure and customer base due to the variety of corresponding economic regions. The unified regulatory rules might lead to the following results. Village and township banks keep breaking the bottom line set by regulation. They might operate in a manner homogenous with commercial banks. Village and township banks exit the game set by the rules. And these results actually deviate from social objectives. Therefore, differentiated supervision should be implemented in banking institutions which vary in target customers, locations, business models, stages of development and different risk preferences.Chapter VI is the focus and conclusion of the thesis:the establishment of differentiated regulatory system of village and township banks. The difference is mainly embodied in several aspects. First, special laws should be promulgated for village and township banks since they are unique financial instituitions between policy banks and commercial banks in legal nature. Try to perfect legal custody configuration of the right to supervise village and township banks through the establishment and improvment of village and township banks legal system. It is necessary to estabish the CBRC as the core to supervise village and township banks and legalize preferential supporting policies for these banks so as to maintain the stability and continuity of policies. Second is to reasonably figure out the three supervisory goals concerning stability, efficiency and fairness of village and township banks and their sequence, upholding the concept of effective supervison. It requires the care of decesion-set of participants and establishment of regulatory framework and regulatory organization system commensurate with this particular financial institution. In consequence, the commercial business practice of this special regulatory object will be consistent with objectives of policy. Accordingly, regulatory objectives can be achieved at the lowest cost. Last but not the least, differentiated regulatory rules must be stipulated. It is of great importance to setting moderately strict or relaxed requriment corresponding to operating peculiarities and risk characteristics of village and township banks in the aspects of licensing, corporate governance and ongoing regulation. Supervisors must set high standards and insist that be met especially in the licensing stage. This chapter also responds to hot issues such as ownership structure, corporate governance, limited license and market exit mechanism related to village and township banks.