Research On The Legal Institutionalization Of Public Finance Bailout On Problem Banks

During the Global Financial Crisis which was trigged by the U.S. subprime mortgagecrisis in2008, some banks of developed economies became problem banks or even verged onbankruptcy. Governments of some countries like the U.S., Britain, Germany, France etc. havetaken actions to rescue domestic banks to maintain financial stability and to mitigate systemicfinancial risks. Public finance bailout, as part of the problem banks bailout system, is aconcerned and controversial issue, because it involves in public funds and relates totaxpayers’ interests. The direct impact of the Global Financial Crisis for China is small, asChina’s financial markets and financial innovation are not fully developed and the governmentregulation of the financial system is stringent. Thus the Chinese government has not takenactions to rescue the banks. The money shortage issue in June2013has attracted publicattention to the sound operation of banks. This issue subsided quickly and did not evolve intoa banking crisis or even a financial crisis, but it reflected some problems of the banks in Chinalike maturity mismatch, weak liquidity management, and incapacity to tackle unexpectedrisks. Under the background of full liberalization of lending rates and the slowdown ofmacroeconomic growth, China’s banking system shall be facing risks and challenges, andsome banks are more likely to become problem banks.In the worldwide, resolution measures of problem banks are government takeover,bankruptcy liquidation and public finance bailout. All of the countries are cautious of rescuingthe problem banks. Public finance bailout should be subject to strict regulation，as it relates totaxpayers’ interests, can lead to moral hazard and can distort market competition mechanism.China has not established systematic legal regulation of public financial bailout of problembanks. The identification mechanism, responsible departments and decision-makingmechanism of problem banks are all lack of legal definition and regulation. China hasrecognized the importance of resolution mechanism of financial institutions and has startedthe work of research and drafting.2014Government Work Report points out that “thecompletion of resolution mechanism of financial institutions” and “the implementation ofcomprehensive, transparent budget system” is the government priorities in2014. This articlediscusses the construction of the mechanism of public finance bailout on problem bankswhich is suitable for the development of the finance and rule of law in China, throughresearch of related theory and practice. This article consists of four parts, except for introduction and conclusion.The first part is the analysis of related concepts. Firstly, it defines the conception ofproblem bank, specifying the target of public finance bailout. Secondly, it explains andjustifies the conception of public finance bailout. Lastly, it analyzes the necessity and risks ofpublic finance bailout on problem banks and thus deduces that we should make it under legalregulation.The second part is about the situation analysis of public finance bailout on problembanks in China. On the one hand, it introduces China’s financial reform process and thusanalyzes the background of public finance bailout on problem banks. On the other hand, itresearches the institutional barriers of public finance bailout on problem banks in China.The third part is about the identification mechanism of problem banks anddecision-making mechanism of public finance bailout. Firstly, it introduces the source anddifferent modes of identification mechanism of problem bank. Secondly, it introduces theCAMELS rating system and analyzes decision-making mechanism of public finance bailoutin America. Lastly, based on the present institutional resources in China, it analyzes theinstitutional odds and barriers to establish the identification mechanism of problem bank anddecision-making mechanism of public finance bailout.The fourth part is about the path of the legal institutionalization of public finance bailouton problem banks. Firstly, it analyzes the principles like last resort, prevention of systemicrisk, recyclable funds, prevention of moral hazard and procedure constraints. Secondly, itgives legislative suggestions from three levels. Lastly, it suggests to specify the responsibledepartments, to build control and coordination mechanism between departments and toenhance the transparency of financial information.