The Selection Of Prudential Banking Regulation Strategy For China

Banking regulation refers to the framework of laws .rules and corresponding implement that correct the market failure in banks' operations and prevent financial risk. In perspective of risk control, banking regulation falls into two categories: preventive and protective ones. The former can be further broken into competition controlling and healthy regulations. At the macroeconomic level of banking regulation, its main purpose is to maintain the stability of the financial industry as a whole; and at the microeconomic level, it is set for depositor protection. Traditional banking regulation theory was based on market failure ,while modern theory is concentrating on risk prevention and management. The dialectical interaction of financial control and innovation is an ongoing process.The international banking regulation has experienced a transformation from free competition, strictly regulation, loose control to discretional management. The past financial crisis in developed and developing economies reminds us that the existence of discretional management should be found in the financial deregulation direction. Being the latest trend in the international banking sector, discretional management puts emphasis on risk prevention and can work more effectively in complement with self-management and engagement of banks.In the short history of twenty years, the banking regulation of China has attained great achievements but left much defects - over-emphasis on safety but with unbearable low returns, over-control on conformation but with less sufficient prudential risk management, less sufficient macro considerations and poor personnel's quality. The banking regulation of China is hence facing great challenges - conflict of interests in reform, new trends in international banking, complex environment in open economic condition, threats of financial crisis and the inevitable integration with international conducts and practice.China prefers discretional banking regulation, which will strengthen risk management and allow appropriate shift of regulation focus. The discretional management will be reflected in every step of banking regulation. In the process of deregulation, appropriate care should be taken. Supervisory measures should be taken, including supervision of sufficiency of capital, full-scale risk management and enhancement of inner control. Protective policies should also be formulated to regulate disclosure of information and deposit insurance, strengthen the role of central bank as the bank of commercial banks and urge its withdrawal from market. Furthermore, associated supportive facilities should be provided, including but not restricted to the improvement of legal system, coordination of financial authorities and the creation of warning system, information system and supervising system on regulators.