1.

0 Introduction
Economists consider the role of the financial system as substantial and fundamental in the
economic system. The financial system has the function of effectively facilitating the
implementation and allocating economic resources. But in some cases, the financial system may
not be able to be well adjusted to the rapidly changing financial environment (ref). As a result,
there have been reforms and in the wake of the global financial crisis, which usually arises from
shocks in the financial market. When it comes to the regulation of the financial sector, regulators
have raised increasing concerns of the banking system given the situation where global banking
activities change rapidly. The regulation of the financial sector is also aimed to improve the
stability and efficiency of the financial system in line with the Basel Committee regulation with
regard to banking supervisions. However, there have been accusations as regulatory systems
cannot effectively deal with the rising housing prices and credit expansion. As a matter of fact,
** (ref) finds out that regulations sometimes provide little check of the decisions and actions
taken by the financial sectors which merely aim to maximize profits. This generates negative
impacts on economic operations, so effective regulations for financial sectors are necessarily
needed.
This paper first presents a critical assessment and evaluation of the need for regulating the
financial sectors by first identifying the role of the financial sector and secondly assessing the
necessity and importance of regulating financial sectors. Then it comes to the discussion of bank
regulation mechanism in China.

2.0 The need for regulations of the financial sector

2.1 The role of the financial sector
The financial system has been evolving though it emerged only a few years ago. It has significantly
changed the manner in which transactions take place. However, regardless of the changes, the
basic principles and the underlying objectives remain the same. For example, from an economic
perspective, the functions of the first modern banks of Renaissance Italy are the same as those
at today (ref), which includes the following four points: value exchange, intermediation, risk
transfer, as well as liquidity. The financial sector is important to the development of the modern
economy and in order for a financial sector to perform its functions, the financial sector needs to
have certain supporting capabilities such as monitoring borrowers.
The financial sector has an important role as it facilitates the provisions of the core provision
mentioned above. These functions also overlap and interact in certain ways. To begin with, the
value exchange of the financial sector ensures a safe and efficient payment system, which
fundamentally supports day-to-day businesses across the world. In the second place, the financial
sector takes an important role of monitoring and adjusting the economy by means of
intermediation. This means that the financial sector builds a relationship between savers and
borrows, for example. And the financial sector can realize the intermediation in many forms in
addition to offering traditional banking services. The intermediation of the financial sector
requires it to be able to perform accurate accounting, risk assessment, as well as process
information. And the fluent operation of the financial system enables funds to be allocated most
suitably according to the productive use. In the third place, the financial sector also has the
important function of pricing and allocating certain risks, which mainly concerns credit risks,
market risks, longevity risk, and so on. It also plays the role of transfer a range of risks and come
up with proper ways to manage them rather completely removing risks. Last but not the least,
the financial sector also has liquidity and the provision of liquidity is essential for businesses to
perform their obligations.

2.2 The importance and need for regulating financial sectors

Given the role and functions of financial sectors, the regulation of financial systems is of great
importance as well because it can not only reduce uncertainties but also increase sanity. Ever
since the emergence of financial sectors, the regulations have also been rapidly developed, in
particular the regulation of the global financial system. However, people raise concerns of
financial systems after the credit crunch, which causes deep thinking of the regulation of financial
institutions and revaluation of risk management approaches (ref).
The Latin American debt crisis occurred in the mid-1980s triggered the Basel Committee to
develop and implement a regulatory system to measure the capital in line with the Basel Capital
Accord, which is the Capital Adequacy Ratio (CAR) and it is utilized as an indicator presenting
credit risk. Apart from this, CAR also applies to make assessment of the health of the banking
sector (ref). During the late 1980s, CAR was applicable to a wide range of countries not only
including the G20 countries but also some developing countries across the globe (ref). In the late
1900s, the Asian financial crisis made a number of financial institutions bankrupt, which showed
a correlation between macroeconomic factors (such as GDP) and the requirement of capitals in
financial sectors (ref). This triggered the generation of the new Capital Accord ‘Basel II’, which
provided another method to calculate CAR. The new calculation approach effectively regulated
the financial sector by making CAR more sensitive to risks as it introduced three complementary
pillars. The need for regulations of the financial sector has been increasing in the 21 st century.
Due to the dramatic downturn the financial market, a wide range of countries across the world
experienced the financial crises and this significantly stroke the global economies as it resulted
in the recessions in many economic sectors (ref). As a consequence, regulations of financial
sectors are increasingly necessary as they are designed to keep the regular and normal economic
operations.
The emergence of financial crisis demonstrates that financial sectors in a variety of countries are
connected with each other, which highly calls for the integrity of financial systems and an overall
regulation so that financial sectors can be controlled in a global scope. Therefore, new financial
regulations have been introduced to achieve this objective and the need for regulations also
contributes to a set of rules and principles alongside Basel 2.5. The regulations of the financial
sector are also designed to enhance the financial institution’s abilities to deal with financial
shocks in the market. Due to the need for regulations of financial sectors in the rapidly changing
environment, the Basel Accord has evolved to include a range of reforms and emphasized the
supervision and risk management of financial sectors (ref). Such regulations can enhance the
governance of financial sectors by increasing the transparency and improving the capital
adequacy requirement (ref).
In addition to minimizing the possibilities of financial crisis, regulations are also set to ensure that
financial sectors have taken their roles and performed the responsibilities effectively. Generally
speaking, customers need regulation to protect their benefits and regulations are important to
guarantee that financial sectors comply with laws in different countries. There are many kinds of
regulations implemented to take control of the activities and performances of the financial
sector, including both rules and principles. The purpose of such regulations is to oversee whether
the financial sector has correctly and effectively deployed the principles incorporated within the
regulatory framework proposed in global regulations such as the Basel Accord. The appearance
of macroeconomic policies is a good case that proves the importance and need for regulations,
which ensures the stability of financial sectors. For example, monetary policies take the role of
controlling the money supply of the country. And this is necessary because they are used to check
the economic growth through setting limitations to expenditures with the aim of reducing the
possibilities of economic recessions.
3.0 The mechanism for bank regulation in China
The mechanism for bank regulations in China has gone through a variety of changes in order to
effectively deal with the proliferating risks which are more and more common to see in the
financial sector. The reforms and changes in the mechanism are also taken to control the pressure
of trading with the United States and the decreasing growth of economies. The banking
regulation mechanism initiates from the establishment of the Financial Stability and
Development Committee. There have been a number of actions taken in relation to inter alia,
which focuses on the elimination of non-performing loans, the financial supports to other non-
bank institutions and so on.
3.1 Key banking regulations in China
The financial regulatory structure in China has been known as “one bank and three commissions”
for centuries. This consists of four regulatory systems: the People’s Bank of China, the China
Banking Regulatory Commission, the China Insurance Regulatory Commission, as well as the
China Securities Regulatory Commission. These four components in the regulatory structure take
respective roles in order to effectively monitor bank activities. PBOC is the central bank in China
and CBRC, CIRC, CSRC take the role of regulating a range of banks, inspecting the insurance, as
well as monitoring the whole banking industry.
3.2 The developments of the bank regulation mechanism
In the past years, the mechanism of the bank regulation in China has reformed in terms of its
regulatory structure. This can be seen from

Conclusion

Reference