Part 5: the suggestion of Chinese government supervises and regulates the shadow banking system

In the last paper, I was talking about the regulation of Shadow Banking System in foreign countries, and both these method are very useful of shadow banking system in China, however, like the Part 2 said, the private financing organizations is typical Chinese style shadow banking, and the regulation method of foreign countries do not covered this part. Therefore, in the following part, I will combine the regulation method of foreign countries and the Chinese reality to make suggestions.

1.     Regulation of the formal financial institution

       For the formal financial institutions, due to the shadow banking system in China is different from the western countries; do not have lots of financial innovation, therefore, the regulation of Chinese shadow banking system is relatively easy. Use the method 3 in last paper which strengthen banking supervision, to reduce the relevance of the traditional banking and shadow banking, strengthen the supervision of bank off-balance sheet business, create relevant laws and regulations, avoid arbitrage of banks, increase the intensity of risk monitoring, strictly prohibited the corporation between commercial bank and such the investment banks, equity funds, private lending which have a high risk, prevent securitization of bank capital. Speed ​​up financial innovation, make the borrowers have more choices, meanwhile, study the experience of the financial crisis, financial innovation should base on services the substantial economy and prevent risks, to development the Chinese financial industry. 

2.     Regulation of the informal financial institution

       Regulation the informal financial institutions is a hard work, financial regulatory authorities need to scientific and comprehensive assess and judge those informal financial institution, to take differentiated measures to these institutions. Not only to resolutely crack down the underground banks, illegal fund-raising and other illegal activities, but also need to guide and regulate the behavior of private financing. Accelerate the legislative process of the investment fund, pawn, finance lease, Micro-credit, warranty and other emerging financial sector; clear the main body of supervision and the method of regulation, made the shadow banking system become “sunshine bank”, this not only makes the Chinese near-monopolistic financial system become more diverse, but also effectively avoids the potential risks posed by the shadow banking.

3.     Strengthening the cooperation between each regulatory authorities

        Because there have lots of financial regulation authority in China, therefore, it need to establish a unite regulatory mechanism, lead by a specify department, such as centre bank, and the relevant departments as members, make the regulatory policies together and Joint Law Enforcement. Strengthen the Statistics of All-system Financing Aggregate, strengthen the supervision of the M0, in order to control the amount of private lending.

These are my humble opinions, probably is not helpful for China, but I will keep study in this topic; hope can help my country avoid the potential risk of shadow banking system.

Part 4: The regulation of Shadow Banking System in foreign countries.

The proper inflation helps economic development, but over-inflation can lead to national bankruptcy. Monetary policy can control inflation, but the existence of the shadow banking system can make the monetary policy failure, causing serious inflation, resulting in the bubble economy, leading to economic crisis. Therefore, government must supervise and regulates the shadow banking system. 

After the 2008 global financial crisis, each government in the world have to strengthen the study of the shadow banking system, made a series of laws and regulations aimed at strengthening the supervision of shadow banking system.

The following part is the summary of the relevant supervisory method.

 1.     Strengthen the supervision of “shadow institutions”

First, begin to regulate the hedge funds, private equity funds and other shadow institutions.

Second, strengthen the regulation of information disclosure. Like the US. Securities and Exchange Commission issued new rules to enhance the liquidity of money market fund industry, credit standards and information disclosure, implementation a higher standards for money market mutual funds.(detail click here)

2.  Strengthen the supervision of “shadow products”

First, strengthen the supervision of the repo market, the Federal Reserve System was be given the power to establish a more stable financing system, to solve the problem of volatile short-term repo market, and ensure the operation of the markets are more health.
Second, regulate OTC derivatives trading. The United States government authorized the Commodity Futures Trading Commission and Securities and Exchange Commission on OTC derivatives regulation. They have the right to decision the trading institution's capital and margin requirements in swap, and limit its risk.(detail click here)

3. Strengthen banking supervision, to reduce the cooperate between the traditional banking and shadow banking

First, according to the Volcker Rules require, prohibit banks own or investing in private equity and hedge funds.

Second, strengthen the consolidated supervision, begin to supervise the Off-Balance Sheet Activities of the traditional bank.
Third, limit the size of the shadow banking system which support by the traditional banks, set higher capital requirements to shadow banking’s risk exposure.
Fourth, strengthen the coordination between the regulators; reduce the structural arbitrage between the banking system and financial system. (detail click here)

4. Establish mature and feasible monitoring methods to strengthen the monitoring of the shadow banking system.