Remarks given at the IIF meeting by the suave Liu Mingkang, head of the China Banking Regulatory Commission (CBRC) since its creation in 2003, suggest that there is another reason to be relatively sanguine about the health of the Chinese financial system: its regulators appear to have a better idea of what they are doing than their western counterparts.
In contrast to western regulators, who put bank regulation on auto-pilot via the model-driven and extremely pro-cyclical Basel II capital adequacy system, Mr Liu made a persuasive case for the enduring value of old-fashioned bank supervision tools such as limits on single large exposures, a conservative 75 per cent loan-to-deposit ceiling, limits on simple leverage ratios, and “window guidance” on exposures to specific companies and sectors.
As Mr Liu cogently summed it up: “Basel II is problematic; traditional ratios are still useful. Small is beautiful and old is beautiful as well.
Tellingly, the administration’s executive summary of its proposals highlights “compensation practices” as a key cause of the crisis, but then fails to say anything about addressing those practices. The long-form version says more, but what it says — “Federal regulators should issue standards and guidelines to better align executive compensation practices of financial firms with long-term shareholder value” — is a description of what should happen, rather than a plan to make it happen.
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