From Rule-Based Regulation To Risk-Based Regulation, Research On The Transition Of The Regulation Of Banking Systems In China

Banking regulation emerged with the occurrences of both local and global crisis in the banking system as a measure to maintain stability and to safeguard depositors' interest. Its main objective is to prevent and control the risk in the banking business. In industrial countries, banking regulation has seen the evolution from laissez-faire to rule-based regulation and to risk-based regulation. The transition from rule-based to risk-based regulation is partly motivated by the intrinsic deficiency of the rule-based regulation and the inevitable risk associated with the financial system.Based on current practices of the regulation of banking systems in China, it can be concluded that we are currently undergoing the transition from rule-based to risk-based banking regulation. However, many problems still exist in the banking system in China, most prominent of which include high level of bad-asset and low capital-adequacy ratio. This indicates our banking regulation has yet to fully achieve its goal.The following conclusions can be drawn from our research. First, the internal risk associated with the financial system is unavoidable; and the rule-based regulation is inadequate to fully achieve its goal of "preventing and managing risks in banking system" due to its intrinsic deficiencies. Therefore, it is necessary for the banking regulation to evolve from a rule-based system to a risk-based system. Second, from the experiences and lessons learned in the transition of the banking regulation system in developed countries and from the new trends in the international banking industry, we can see the major problem in the current transition in China: inadequate management of both internal and external risks of the banking system. As a result, China should expedite the transition from rule-based to risk-based banking regulation by addressing both internal and external regulatory problems simultaneously.