ADBI Working Paper Series
Reform of financial regulation is a priority on the international agenda. At the call of the Group of Twenty Finance Ministers and Central Bank Governors (G-20), a number of new international standards have been issued, most notably Basel III. As a member of the G-20, the Financial Stability Board (FSB), and the Basel Committee on Banking Supervision, the People’s Republic of China (PRC) is now on a faster track in adopting international standards. However, the key issue for the PRC—as well as many other emerging markets—is to how to keep focused on the domestic policy agenda while adopting the new global standards. Fortunately, the PRC’s financial system has proved resilient to the recent financial crisis. As a result, banks in the PRC find it quite easy to meet the new Basel III capital and liquidity standards. Basel III is only part of an effective regulatory framework. While phasing in Basel III, the PRC needs other prudential tools such as a new provision ratio, in addition to the provision coverage ratio. Activity restriction will be another effective tool with the potential to prevent banks from becoming too complicated for bankers to manage and for the regulator to supervise. As we work hard to improve the effectiveness of the regulatory system at both the global and national level, we should remind ourselves of the importance of keeping the balance between enhanced regulation and promoting financial innovation—without the pendulum swinging too far.