What Is Regulatory Capture?

The theory of financial supervision is also called the numerator and denominator game theory. The Basel Accord places stringent requirements on the capital adequacy ratios of banks around the world, stipulating that banks that carry out international settlement business must have a capital ratio of not less than 8%, of which the core capital ratio cannot be less than 4%. In order to meet this requirement and improve their competitiveness in the market, some banks often restructure to reduce asset size and increase capital, thereby increasing their own capital ratio.

Financial supervision theory

Right!

The theory of financial supervision is also called the numerator and denominator game theory. The Basel Accord places stringent requirements on the capital adequacy ratios of banks around the world, stipulating that banks that carry out international settlement business must have a capital ratio of not less than 8%, of which the core capital ratio cannot be less than 4%. In order to meet this requirement and improve their competitiveness in the market, some banks often restructure to reduce asset size and increase capital, thereby increasing their own capital ratio.

Chinese name

Financial supervision theory

Types of

theory

Sector

financial

Provenance

"Basel"

According to the calculation method of the Basel Accord, the formula for measuring the capital ratio of banks conducting international settlement business is:

Tier 1 capital ratio = core capital / risk assets × 100% = core capital / (assets × risk weight) × 100%

Total risk capital ratio = total capital / risk assets × 100% = total capital / (assets × risk weight) × 100%

The so-called molecular countermeasure is to expand the core capital of the bank, while using its subsidiary capital to make the total capital expand rapidly. The so-called denominator strategy is to make full use of liabilities, reduce total assets, optimize risk capital structure, and reduce risk weight.

The issue of government intervention or laissez-faire has always been the main focus of debate among various economic schools. Although financial supervision itself is not the same as government intervention, the theory of financial supervision is strongly supported by the theory of government intervention. It went up and changed. At the same time, financial supervision activities are highly practical. Therefore, when we review the development of financial supervision theory, we must consider both the influence of mainstream economic thought and theory at the time and the financial field at the time. Practice and regulatory philosophy.

Early financial supervision did not have fixed institutional arrangements to follow. The legal basis for the government's supervision of financial activities can be traced back to the "bubble law" promulgated by the British in the early 18th century to prevent excessive speculation in securities. But the real financial supervision is directly related to the emergence and development of the central bank system. The universal establishment of the central bank system is the starting point of modern financial supervision, and related financial supervision theories have also taken shape. As we all know, classical economics and neo-classical economics have always opposed government intervention. The "invisible hand" creed is theoretically contrary to the financial supervision function of the central bank. According to Adam Smith's "real paper" theory, as long as the bank invests mainly in short-term commercial paper that reflects actual production, it will not trigger inflation or deflation, and the "invisible hand" will still work and does not require a central bank Dedicated to manage currency. In this regard, Henry Thornton pointed out in the "Bullion Controversy" of 1797-1825 that the continuous discounting process of real bills will lead to the extension of the credit chain and the doubling of the credit scale, so the principle of real bills cannot guarantee Banks have sufficient liquidity or money supply elasticity to prevent banks from being run down and trigger inflation or deflation. Therefore, the issuance of bank notes based on the principle of real notes has the danger of over-issuance and should be subject to centralized supervision. In more than half a century of controversy, Thornton's point of view was supported by practice, and central banks for unified currency issuances were established. Therefore, the central bank system was originally established for the unified management of currency issuance, not for the supervision of the entire financial system, let alone the micro-behavior of financial institutions.

In addition, in classical and neo-classical studies, money is "neutral" and has no substance to the economy. Therefore, the central bank's unified currency issuance is the same as unified measurement and measurement, but it is convenient for economic activities. Its behavior is still "night watchman" In the sense, not government intervention. The other function of the central bankestablishing a nationwide unified bill clearing system and coordinating bill clearing is also true in nature.

After the issuance of unified currency and the clearing of unified bills, the instability of currency credit has not disappeared. Many institutions often cause chain reaction-type fluctuations in the financial system due to careless credit expansion, which causes monetary tightening and restricts the economy. This is in clear contradiction to the "currency neutrality" of classical economics and neo-classical economics. Therefore, as a currency manager, the central bank gradually began to assume the responsibility of "insurance" on credit, as the last lender of many financial institutions to provide it with the necessary financial support and credit guarantee, the purpose of which is to prevent bank chain failures due to public run-ups And drastic fluctuations in economic activity as a whole. In this way, the central bank has gradually derived the function of the lender of last resort from a currency management function characterized by the issuance of a unified currency and the provision of a flexible money supply, and assumes the responsibility of stabilizing the entire financial and economic system.

The "final lender" (LLD) system is still not considered financial regulation, but it has laid the foundation for the central bank to further evolve into a regulator of broader financial activities. Because the central bank's final loan can be an important weight to force financial institutions to comply with its instructions, it is possible and necessary for the central bank to further examine the financial institutions' operating behavior. This kind of inspection of operating behaviors has continued to the central bank's various on-site inspections and off-site inspections of all financial institutions, mainly commercial banks. But this kind of inspection is mainly based on the arrangement of the loan agreement, which is similar to the financial and credit inspections performed by commercial banks on lending, rather than administrative or procedural actions. Therefore, financial regulation in a truly modern sense was after the Great Crisis of the 1930s.

Soon after the outbreak of the Great Crisis in the 1930s, the United States passed congressional legislation to give the central bank (and later the securities regulator) a real supervisory function, and thus began to carry out administrative supervision and legal supervision of the financial system.

All in all, the financial supervision before the 1930s was mainly focused on the implementation of monetary management and the prevention of bank run-up policies, and the regulation, supervision and intervention of financial institutions' operating behaviors were rarely discussed. This situation was related to the heyday of the free market economy. However, the great crisis of the 1930s finally reversed the direction and focus of financial supervision theory.

2. 1930s-70s: strict supervision, safety first

The great crisis of the 1930s showed that financial markets are highly incomplete, and the ability of the "invisible hand" to be omnipresent is just a myth. In the financial market, due to incomplete market information and the characteristics of the financial system, the operation of the market sometimes fails. During the Great Crisis of the 1930s, the collapse of a large number of banks and other financial institutions gave financial and The economic system has brought great shocks and even affected the foundation of capitalism.

After the Great Crisis, Keynesianism based on incomplete markets, advocating state intervention policies, and emphasizing fiscal policies gained mainstream status in economics, which was also the background for the rapid development of financial supervision theory at the time. During this period, the theory of financial supervision was mainly based on maintaining the security of the financial system and making up for incomplete financial markets. Macro-policy theories that advocate government intervention to make up for market deficiencies, as well as the development of market failure theories and information economics, have further promoted the theory of strengthening financial supervision. The research results of financial supervision theory during this period believe that the free banking system and all-round financial institutions have strong fragility and instability. They believe that banks' excessive participation in investment banking business and eventually trigger chain failures are the trigger of the economic crisis. .

The theory of financial supervision in this period mainly conformed to Keynesian economics's skepticism of the "invisible hand" automatic adjustment mechanism, and provided a powerful annotation for the strict and extensive government financial supervision that began in the 1930s, and became the second The main arguments for further tightening financial control in major western developed countries after the Second World War. Under the influence of Keynesian macroeconomic theory, traditionally the monetary management function of the central bank has been transformed into formulating and implementing monetary policies and serving the objectives of macroeconomic policies. Financial supervision is more inclined to direct government regulation and abandoning the free banking system. From the perspective of laws and regulations and the focus of regulation, the regulation and intervention of the specific business scope and methods of financial institutions has gradually become the main content of financial supervision during this period.

3. 1970s-late 1980s: liberalization, efficiency first

In the 1970s, the "stagflation" that plagued developed countries for ten years declared the bankruptcy of Keynesian macroeconomic policies. Liberalism and ideas represented by neoclassical macroeconomics and monetarism and the supply school began to revive. In terms of financial supervision theory, the theory of financial liberalization has gradually risen and has continued to expand in academic circles and the actual financial sector.

The financial liberalization theory has challenged the financial supervision theory since the 1930s from two aspects. On the one hand, financial liberalization theory believes that the government's strict and extensive financial supervision has reduced the efficiency of financial institutions and the financial system and suppressed the development of the financial industry, which ultimately led to the effect of financial supervision and the goal of promoting economic development. On the other hand, financial supervision, as a government action, is actually limited by the government s ability to resolve financial market incompleteness. The incomplete and asymmetric information in the market mechanism exists in government finance. It is also encountered in the supervision process, and may be more serious, that is, the government will fail.

The "financial repression" and "financial deepening" theories are the main parts of the financial liberalization theory, and their core proposition is to relax the excessively strict control of financial institutions, especially to lift the financial institutions' interest rate levels, business scope, and geographical choices of operations. Restrictions in various aspects will restore competition in the financial industry to improve the vitality and efficiency of the financial industry.

If the core of financial supervision theory from the 1930s to the 1970s was that the safety of the financial system is a priority, then the theory of financial liberalization respects the principle of giving priority to efficiency. The largely unregulated free financial system before the 1930s collapsed during the Great Crisis of the 1930s, resulting in the security of the financial system becoming a priority target for people. From the 1930s to the 1970s, increasingly extensive and in-depth financial supervision, especially those directly The price controls and administrative controls on specific operating behaviors have severely constrained the hands and feet of financial institutions in their self-management and self-development. However, under the circumstances that the deposit insurance system has fully exerted its stabilizing role and bank run-down has been greatly reduced, The requirements for efficiency and effectiveness have become increasingly prominent and have exceeded the importance of safety goals. Therefore, the theory of financial liberalization is not a complete denial and abandonment of government financial supervision, but requires government financial supervision to make necessary adjustments that are suitable for efficiency requirements.

4. Since the 1990s: Financial supervision theory with equal emphasis on security and efficiency

The "rejuvenation" of liberal economic theory does not negate the inherent shortcomings of the market. The difference between them and the "government intervention theory" is mainly reflected in the scope, means and methods of "intervention". Therefore, the pace of financial liberalization has not stopped, whether in developed countries or developers. In the second half of the 1980s and early 1990s, financial liberalization reached a climax, and many countries have relaxed their financial market and financial commodity prices. Regarding regulation, a global, open and unified financial market is taking shape.

However, since the beginning of the 1990s, a series of regional financial crises have erupted in succession, forcing people to start to pay attention to the security of the financial system and its systemic risks. The contagion and anti-contagion of the financial crisis became the focus of financial supervision . Before the Asian financial crisis in 1997, facing the upsurge of financial openness in various countries, a group of people of insight, such as Stiglitz and Aoki Aoki of Japan, had proposed the theory of financial restraint, which became a sign of further development of financial supervision theory. Sex. The cause of the financial crisis has been studied a lot in the theoretical world. Generally tend to think that financial liberalization and deregulation are not the most important thing. Facts have proven that many highly open economies have high financial freedom and market stability, and provide efficiency guarantees for economic development. . Some experts believe that the crux of the problem may lie in those countries that have implemented financial liberalization, their governments' ability to manage financial activities, and the order of economic development and opening strategies.

The wave of financial crises in the 1990s pushed the theory of financial supervision gradually to how to coordinate security, stability and efficiency. Compared with the previous financial supervision theory, the current financial supervision theory, in addition to continuing to study financial supervision issues based on market incompleteness, has also begun to pay more and more attention to the uniqueness of the financial industry. Requirements and impact. The emergence and development of these theories has continuously pushed the financial supervision theory to shift towards managing financial activities and preventing risks in the financial system. In view of the substitution effect between risk and benefit, the result of this evolution of financial supervision theory is not only different from the financial liberalization theory that gives priority to efficiency, but also the financial supervision theory that gives priority to security and stability in the 1930s and 1970s. New integration and balance among the players.

In addition, in the face of integration and globalization, the prevention of cross-border financial activities and cross-border coordinated supervision have also become the focus of current financial supervision. International financial organizations such as the International Settlement Bank and the International Monetary Fund have made new contributions to the development of international financial supervision theory.

The Development Trend of Financial Supervision Theory Looking forward to the financial supervision of countries in the world, especially the western developed countries, with the development of finance, it has undergone a long-term evolution process, and the financial supervision theory running through it has also undergone tortuous evolution. In general, the theory of financial supervision has developed along with the main line from freedom to regulation, deregulation, and reregulation. Although these financial supervision theories have noticed that the financial system affects the overall economy, they have not paid enough attention to the financial system or the financial activities themselves. This makes the financial supervision theories inadequate and leads to the dilemma of how to deal with stability and development. The theory of financial regulation in emerging market and developing countries is also immature. Historically, especially since the 1990s, developing countries or emerging market countries are more prone to crisis, and they also need a theory of financial regulation suitable for their own development. In general, it can be foreseen that the future financial supervision theory will focus more on the internal constraints of financial institutions and systems, that is, more emphasis on financial institutions and the incentive compatibility within the financial system, and how financial institutions can consciously and proactively Institutional arrangements to prevent financial risks. The focus of supervision will be mainly on risks in the business field, and it will move towards modelization and measurement. In addition, with the acceleration of economic and financial globalization, new challenges have been raised for international cooperation in financial regulation. And the frequent exchanges of international financial activities will also make how to coordinate international financial supervision reflected in the theory of financial supervision.