On The Introduction Of Pre-commitment Approach Into China's Financial Holding Company Law

Along with the formulation and development of the Basel Accord, prudent risk control with its focus on the regulation of capital adequacy has gradually become the core of international bank regulation. Before the Basel Accord, executive methods are the main measures of bank capital regulation adopted by major states of the world. The Basel Accord proposed the standardized approach and the VaR approach in succession as methods for bank capital regulation. In the application of the two approaches, their limitations and disadvantages were gradually discovered among which the fundamental one is the"incentive incompatibility". In the 1990s', with the application of information economics in industrial economics, incentive regulation theory as the result of the research and application of asymmetric information game theory emerged and evolved in the west world. Against this background, the Federal Reserve Board of the United States proposed the pre-commitment approach to capital adequacy regulation. In compliance with the pre-commitment approach, the Federal Reserve requests each bank to pre-commit a maximum trading loss at the beginning of each term (usually a quarter) it prepares to undertake, hence the capital requirement of the bank against its market risk of the very term. After examining the quarterly report of the bank, the regulatory authority will take appropriate measures to the bank according to the fact that whether the bank's loss exceeds the limitation it sets for itself. If the loss exceeds the committed capital level, the bank will be punished in forms of fine, regulatory penalty or commitment of more capital requirement in the future. This approach was developed in the United States where the financial holding company is the main form of mixed operation in financial business, therefore it is a very important reference for China, who is trying to transform its financial industry into a mixed operation one by adopting the form of financial holding company.First of all, the article presents to the readers a panaroma of the pre-commitment approach, inculsive of its origin, content, theory, application, advantages and disadvantages, while highlighting its"incentive compatibility"feature. Then the article gives an introduction of basic theory of financial holding company and the development of such companies in China, pointing out the special financial risks brought by these companies. Hence the necessities of srengthening the risk control of financial holding companies in China. And then in light of the abscence of financial company law in China and the"incentive incompatibility"in risks regulation caused by the current separate operation in financial sector, the article points out the necessities to introduce the pre-commitment approach, and then anylizes the possibility and importance of the introduction. And in the final part, the formulation of the institution of PCA is explored with the author's own analysis and conception.