Mr Liu: Regulation of improper trading of banks and controlling shareholders

The chairman of the Banking Regulatory Commission, Mr Liu, has written for the FT, in which he mentions that the CBRC will enact regulations to prevent improper transactions between banks and controlling shareholders. The following is the full article: In an increasingly interconnected world, financial risks are now spreading like infectious diseases.　　One of the effective ways to prevent the spread of risk is to build a firewall between banking and capital markets. Regrettably, many people have forgotten this principle or have suspected it to be "outdated". But in China, we have retained this firewall mechanism in the reform of the financial system. In China, only qualified commercial banks can be allowed to engage in non-banking activities and establish a strict firewall between the two. We insist that deposits should always be the main source of financing for banks.　　In addition, the China Banking Regulatory Commission (CBRC) is developing a regulation that will require the establishment of firewalls between commercial banks and their controlling shareholders, as well as between commercial banks and their non-banking branches, to prevent risk contagion. Sometimes the most effective way to solve a complex problem is to take advantage of simple and effective basic methods. Practice shows that traditional means often work, especially considering that financial engineering is likely to fail.　　In recent months, we have noted that many regulators in other parts of the world are starting to take this "back to basics" approach. There has been much discussion about the causes of the global financial crisis, but it seems to me that the crisis can be attributed to the following 5 areas. First, imperfect financial innovation erodes the firewall between capital markets and banking markets; second, there is a disregard for overall prudential regulation; Third, the financial institutions are too leveraged and too opaque; and, four, incentives for employees in financial institutions are driven by short-term gains rather than long-term earnings;　　, injecting capital and liquidity before clearing the balance sheet. At present, China's financial system looks very different from its western counterparts. Between 2003 and 2008, total banking assets increased by 34.7 trillion yuan (5.08 trillion US dollars), 1.3 times times higher, while banking profits rose by 521.8 billion yuan, up 17 times times. To some extent, China's banking sector is in better shape due to China's prudential banking regulation.　　We believe that banking is deeply rooted in the real economy, and although the pace of the financial sector can temporarily transcend the real economy, this cannot last forever. There is an old saying in China, "see Wood without forest", meaning that one sees only trees, but ignores the whole forest. As banking regulators, we will always see the whole system as an organic whole, and that is our responsibility, because individual banks sometimes overlook the risk at the systemic level or lack the means to do so. In practice, we have been conducting industry assessments, monitoring related changes, and alerting banks to potential systemic risks identified.　　We have also taken measures to prevent the spread of risk across markets and across borders. Obviously, when a large number of market participants are taking action in the same direction,Leads to irrational exuberance and herd mentality. That is why regulators must always play an important role. We believe that it is a serious mistake for regulators to stay aloof.　　In China, we trust our regulators, but always check the information they provide and retain the final inspection rights, especially for innovative financial products. Regulation has never been easy in China, and it is more difficult to be a good regulator. Despite the remarkable progress we have made, China's banking sector still faces a daunting task. Surely this will be a difficult year for the Chinese economy. Banking institutions will find themselves under greater pressure. In this regard, we must do more to strengthen corporate governance, internal controls, risk management, employee training and regulatory skills. Over the years, the CBRC has been continuously upgrading its regulatory capabilities by drawing on best practices in the international context and basing itself on China's national conditions. The CBRC has recently been invited to join the Basel Committee on Banking Supervision and the newly established Financial Stability Board (Financial stability Board). We will use these opportunities to share ideas, learn lessons and make a contribution to strengthening regulation at home and abroad. We will work with other countries to build a more efficient and transparent international financial system.