U.S. Financial Regulatory Reform: a Revelation to China

The 2008 U.S. financial crisis led to a serious global recession and crumbling of the U.S. financial system. There are many reasons behind this crisis, but a major cause is a financial system without appropriate regulations. Therefore, it is necessary to have a comprehensive evaluation and overhaul of the American financial regulatory system.

U.S. Financial Reform Bill
Has Global Implications

On June 17, 2009, President Obama announced the federal government’s blueprint for financial reform (U.S. Treasury, “Financial Regulatory Reform: A New Foundation). From the perspectives of institutions, markets, consumer protection, and international cooperation, the bill provides a thorough reform of the American financial regulatory system, including boosting the image of the Federal Reserve as a risk management regulator, establishing new rules on financial derivatives, and strong supervision over hedge and private equity funds.

In order to patch the holes in the old financial regulatory system and prevent a recurrence of a similar financial crisis, the US financial reform focuses on the following [issues].

First, the capital structure, liquidity and leverage ratio of banking institutions will be tightly monitored to control risk and prevent economic turbulence.

Second, hedge funds must be registered with the government; large hedge funds will be regulated by the federal government.

Finally, asset-backed lending and other financial products will be strictly supervised. Toxic assets will be completely subject to transparent global regulations.

Such regulatory reform focuses on concepts, institutions, and methodology, as well as on internal and external synchronization to achieve a complete overhaul of the existing financial system. In other words, the blueprint for this reform will reinforce the power of financial regulatory bodies, create a financial regulatory committee, and establish consumer protection agencies on financial products.

On one hand, it will reduce systemic risk in the financial system, protecting American consumers and investors from abusive practices associated with credit card companies, banking institutions, and the mortgage market. On the other hand, it also hopes to establish new standards in line with foreign countries in order to create a common regulatory structure to monitor similar financial derivative products. In this way, it will be easier to supervise international financial institutions through multilateral agreements and collaboration with foreign regulatory agencies.

Any systemic reform is a redistribution of benefits, especially with such an important reform. In order to synchronize the benefits of the overall financial market so that different organizations can maximize their benefits, financial reform must be backed up by reasonable and rational theories and have public consent. Thus, this reform bill took over a year to be passed [in the House]. Its [potential] impact on the financial market cannot be underestimated.

China Needs Its Own
Financial Regulatory Reform

The American financial market is the most advanced in the world, though an imperfect system is inevitable. However, significant changes in the American financial system have a critical impact on global market development, including China. If the American financial market is a mature market, the Chinese financial market is only in its infancy. After problems of a mature market surface, the Americans established new concepts of financial regulation, formulating new rules to adapt to changed economic circumstances, revamping the financial system.

China not only has to closely watch the development of American financial reform, she also has to re-investigate her existing risk management concepts and create a new financial regulatory system to keep up with the modern economy and rapidly developing financial markets.

For example, a better understanding of systemic risk, separation of conventional and new banking products, financial engineering, and financial derivatives will be necessary. China has learned a great deal in recent years by following the American financial model. Now, she has to seriously reconsider what she has learned. During this re-evaluation process, she has to carry out a comprehensive reform of the Chinese financial regulatory system. She cannot wait to declare financial reform only after an outbreak of a financial crisis, as this will be too late.

In all, the American Financial Reform Bill has significant consequences to the financial system. It will adjust the benefits of the American financial market and change how it operates. Its [potential] impact on global financial markets cannot be underestimated. As for China, she has to closely watch the development of American financial reform. Moreover, she has to re-examine and impose changes in the Chinese financial regulatory system so that she can create a functional system to cope with China’s economic development. Only under such conditions will China be able to improve her competitiveness in the global financial market.