Xu Zhong (徐忠), the head of the People’s Bank of China’s research department, has outlined key changes to the country’s financial regulatory system that will result from the State Council’s proposed merger of the banking and insurance authorities.
In an essay published by China Finance Online entitled “Financial Regulatory System Reforms Prompt Regulators to Focus on Regulatory Enforcement” (金融监管体制改革使监管者专注于监管执行), Xu says the State Council’s sweeping raft of administrative reforms focus primarily on three key areas:
I. “Upholding the direction of integrated operation in the financial sector, going with the trend of integrated operation, and merger of the China Banking Regulatory Commission and the China Insurance Regulatory Commission.”
According to Xu the unified administration of the banking and insurance sectors is “the necessary choice for going along with the trend of integrated operation.”
“Integrated operation has already become the trend in the Chinese financial sector, distinguished by in-depth cooperation between banking and insurance sector and integrated development.”
Xu points out that China has recently seen the overlap and convergence of banking and insurance products, with life insurance products developing savings functions similar to those of bank deposits to become “savings life insurance.”
According to Xu cooperation between the banking and insurance sectors is also continually deepening, with Chinese banks already emerging as key sales channels for insurance products.
Xu believes that these developments make the unification of banking and insurance regulation a necessity, while also helping to integrate regulatory resources and shore up efficiency.
“Banking and insurance are similar in terms of regulatory concepts, regulations and tools, and have similar demands in terms of regulatory resources and regulatory professional capability.
“Given that in China financial regulatory resources and professional human resources suffer from a ‘supply-demand imbalance’…unified regulation is of benefit to exploiting coordination effects, concentrating and integrating regulatory resources, and raising the quality and efficiency of regulation.”
II. “Separation of developmental and regulatory functions, separation of regulatory rules and enforcement, making regulators focus on regulatory enforcement, raising the professionalism and effectiveness of regulation.”
According to Xu one of the key causes of the scandals and risks which have arisen in recent years has been the fact that the authorities are responsible for both fostering the development of the Chinese financial sector as well as regulating it.
“Just as the IMF’s financial stability assessment points out, Chinese financial malfeasances is very largely related to the lack of a divide between regulation and development.”
Xu says that the current round of administrative reforms will give entrust the Chinese central bank with financial development, which will “enable regulators to focus on regulation, and raise the professionalism and effectiveness of regulation.”
Key roles that PBOC will undertake to foster the development of the financial sector will include overall preparation of financial sector development plans, as well as overall responsibility for mergers and restructuring in the financial sector, and “security inspections of overseas opening.”
One of the more important roles that PBOC will assume will be overall drafting of financial sector legislation, which Xu says will help to prevent regulatory arbitrage.
“Financial legislation will no longer be individual affair of each department, avoiding problems such as conflicting laws, and lagging preparation of certain legislation.
“With the division of regulatory planning and enforcement, the People’s Bank of China will be responsible for the formulation of major financial sector regulatory policies.”
According to Xu this division will “firstly be of benefit to ensuring the pragmatic division of development and regulatory functions,” and “secondly be of benefit to the prevention of systemic financial risk.”
III. “Strengthening PBOC’s macro-prudential regulatory role, implementing the ‘Three Overall Plans.'”
Xu points out that the 2008 Global Financial Crisis prompted countries around the world to strengthen the macro-prudential role played by central banks, and establish more effective macro-prudential regulatory systems.
China’s 5th Financial Work Conference called for the “strengthening of PBOC’s macro-prudential regulatory and systemic risk prevention roles,” while President Xi Jinping recently proposed the reform concept of the “three overalls” in his recommendations for the 13th Five Year Plan.
The three overalls include “overall regulation of systemically important financial institutions and financial holding companies, “overall regulation of key financial infrastructure,” and “overall responsibility for comprehensive statistics for the financial sector.”
Under the first “overall” PBOC will have the power to identify systemically important financial institutions, as well as to investigate and sanction them, and veto the appointment and dismissal of their senior executives.
The second “overall” will see PBOC plan, establish and regulate key financial market infrastructure (including various financial asset registration and trusteeship entities), as well as exercise a veto over the formulation and amendment of the main operating regulations of financial exchanges.
Under the third “overall” PBOC will be allowed to engage in “direct data collection” based on professional necessity whenever macro-economic adjustments, systemic risk or other major issues arise.