Roadmap for finance
Debate about whether different financial sectors should be mixed or strictly compartmentalized in China has never really abated even after the enactment of the 1995 Commercial Bank Law, which stipulates separation.
The clause about absolute separation between banking, securities and insurance and other financial sectors was written into the law in the aftermath of a series of losses believed to be caused by the mixed operations by financial institutions in the late 1980s and early 1990s.
But an unavoidable side affect of this compartmentalization is its limited development scope and, quite ironically, limited tools for financial enterprise risk management.
The time is ripe now to make it clear that the barriers will be torn down gradually to give our financial institutions an opportunity to become more competitive and thus make the whole financial industry more efficient.
The pressure to scrap the barriers comes from both inside and outside.
After more than two decades of market-oriented reforms, China’s financial industry is now at a stage where many of the industry players are in genuine need to expand.
This is quite a different situation from 1990s when many financial institutions waded into other sectors simply for speculative interests. Today, insurance companies are in dire need of more investment vehicles to generate profits and pay their customers.
Commercial banks also need more sophisticated tools many of the useful ones are beyond the boundary of the banking sector to dispose of their non-performing assets. Four asset management companies were established in 1998 to specialize in handing the bad assets of major State banks. But the banks need to fend for themselves in dealing with their new bad assets. In fact, some ambitious financial institutions never gave up their efforts to breach the barriers.
Regulators have also been wise enough to approve some experiments, a hallmark practice for China in its history of economic reform. Regulators made a significant step earlier this week to allow insurance companies to invest in commercial banks.
However, a more clear answer about the prospects of an integrated financial industry should be made and a roadmap presented to make people know where the industry is heading.
It was reported that to meet the need for an integrated financial industry, a mega regulator could be established to oversee the whole financial sector.
Such a regulator can be useful. But what is more important is that industry players and regulators should greatly enhance their capabilities to deal with potential risks.
Challenges for regulators are particularly big because they have to be well versed in the whole financial industry and be well equipped to tackle all the problems that they have never met in the compartmentalized framework.