Regulation and supervision for foreign banks in China

Part 3 : Problems in current foreign banks regulation and supervision system in China.

There are some problems documented by people did research about this topic, for example: Duan(2007) reported current laws and regulations system on foreign banks is incomplete, Su(2008) indicated that current bank regulation and supervision for foreign banks is inconsistent and low efficiency. Here, I would discuss other two problems from my research.

The first problem: Prefer compliance management to risk management.

This table compared the regulations for domestic and foreign banks, the first five restrictions for domestic and foreign banks are almost the same, however from the criterion of Branch bank foreign Asset liability ratio, Branch bank capital ratio in prescribed form, Branch bank liquidity ratio, Branch bank capital adequacy ratio we can know, regulations for foreign banks is more strictly than for domestic banks in China. The problem is the regulators rely on these ratios too much, which means they focus on the compliance management in bank regulation. These ratio can reflect risk of break the law of the foreign banks but cannot reflect the potential credit risk, market risk and operational risk. According to Basel II, the credit risk, market risk and operational risk are link to each other, therefore I think Chinese regulators need a appropriate risk management system to supervise the foreign banks, not just copy some standards from American ROCA and CAMELs risk assessment system.

The second problem: Lack International co-operation for foreign bank regulation

From the data in Part 2 we can find, the large proportion of foreign banks in China are the foreign bank branches. As we know, regulation for foreign bank branches is much more difficult than foreign legal person banks, because the host countries cannot get the whole business information of the foreign bank branches(their business information managed by bank in their home countries), so host and home countries need co-operation for foreign bank regulation. However, The Regulation on Administration of Foreign Banks (2006)documented that regulation on foreign banks liquidity is the responsibility of the host country and there is not a specific treaty and regulations about international co-operation for foreign banks regulation in China. Also, China do not use Basel Accord system, therefore, even the regulator can get the regulation information of the foreign bank from the home countries, these information might invalid under the Chinese regulation system. These problem would increase the potential risk of the financial market.