International cooperation necessary to prevent future financial crisis as capital flows becomes more globalized
The recent financial crisis has exposed critical vulnerabilities in the modern financial system. However, the current reforms proposed by the Financial Stability Bureau and global standard setters, such as the Basel Committee on Banking Supervision, are certainly a step toward building a more resilient global financial system.
Chinese regulators welcome the new capital and liquidity standards approved by the G20 in November (the so-called BASEL III rules), and China's banking regulator, the China Banking Regulatory Commission (CBRC), has already begun the process of revising its own regulations so that BASEL III can be implemented by beginning of 2012.
The recent crisis occurred because the global financial system had become over-leveraged, over-complex, and under-regulated in key areas. These characteristics contributed to the fragility of the system and eventually led to the crisis. To prevent a future crisis, we need a simpler financial system that is less leveraged, and better regulated.
That transformation, which the current reforms are leading to, will have costs. Some vested interests will be hurt, and there will be costs and uncertainties in the adjustment process. However, trade-offs are necessary to avoid the disastrous consequences of unmanaged fragility.
Liu Chunhang is the director general of the policy research bureau and statistics department, China Banking Regulatory Commission.
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