In Finance, What Is a Steady State?

Financial stability refers to a state in which the entire financial system of a country does not experience large fluctuations, the function of finance as a financial medium is effectively exerted, and the financial industry itself can maintain stable, orderly, and coordinated development, but it does not mean that No financial institution will fail. The term "financial stability" currently has no strict definition in the theoretical and practical circles in China. Scholars in western countries have no unified and accurate understanding and generalization of this, and they mostly analyze financial stability and its importance from the aspects of "financial instability" and "financial fragility".

Financial stability

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Financial stability refers to a state that is the whole of a country

World Bank research shows that since the 1970s, a total of 117 systematic outbreaks have occurred in 93 countries

Introduction to Financial Stability

Internationally, there are four main types of policy tools for financial stability: one is relatively independent policy tools, including four methods of monitoring payment and settlement systems, macro-prudential analysis, emergency liquidity assistance, and crisis coordination management; the second is the use of monetary policy tools To stabilize the financial system, including monetary and credit policies, short-term interest rates, open market operations, and information exchange and window guidance; the third is to use financial supervision to maintain the stability of the financial system, including prudent control and prudential supervision; the fourth is to use the risk compensation system to maintain The financial system is stable.

Judging from the status quo of China's current financial stability system construction, all four types of financial stability policy tools need to be established and developed in a coordinated manner.

Financial Stability Challenges to Independent Financial Stability Policy Tools

First, ensuring the security and efficiency of the central bank's payment and clearing system is the primary issue for maintaining financial stability. Because the payment and settlement system is the core of the financial infrastructure. Central banks of all countries strive to allow the monitoring and management of payment clearing systems to cover all areas related to large-capital transactions. However, from the current point of view in China, the People's Bank of China is only responsible for the construction of payment and settlement systems and the formulation of related standards, while the supervision of bank card business and the corresponding capital transactions are the responsibility of the China Banking Regulatory Commission. This part of risk supervision is still outside the supervision of the People's Bank's payment system, which has caused some adverse effects on the stability of the payment system.

Second, micro-prudential supervision and macro-prudential analysis need to be coordinated. At present, there is a domestic opinion that the role of financial supervision and the role of financial stability are equivalent. If every financial institution is good, then the financial system is good; when one institution fails, it triggers the failure of other financial institutions. The crisis of the financial system has arrived. However, if the focus is only on micro-prudential regulation of individual financial institutions, other more important risks at the macro level may be ignored. Studies at home and abroad have shown that the greatest credit risk always occurs during the peak period of the economic cycle. At this time, if the traditional indicator analysis of micro-prudential supervision is applied, the risk appears to be minimal.

Third, the issues of emergency liquidity assistance and moral hazard cannot be ignored. Emergency liquidity assistance, also known as the "last lender" function, is the most traditional tool used by central banks to deal with financial instability. Due to the possibility of moral hazard, economists have proposed various solutions, including imposing punitive interest rates on problematic financial institutions; adopting a constructive ambiguity strategy when providing emergency loans; and requiring financial institutions with problems to provide collateral , And organizing the private sector to assist problematic institutions. However, China's current institutional arrangements for emergency liquidity assistance are only reflected in the "Regulations on the Management of Special Loans from the Central Government to the Central" issued by the Central Bank and the Ministry of Finance. Working procedures. This reflects the principle of "constructive ambiguity" to some extent, but other measures to prevent moral hazard are still being explored.

Finally, the problem of coordinated crisis management cannot be avoided. Preventing the financial crisis must be based on early analysis and early correction. It is necessary to establish a risk early warning system for financial institutions and improve risk treatment measures as soon as possible. Especially in the financial crisis caused by the risks of individual financial institutions, there must be some mechanisms and measures to detect the risks of financial institutions in a timely manner. When the quality of assets deteriorates, there is enough pressure to correct it as soon as possible. This is the "timely corrective action". At the same time, for the unpredictability, contagion, and harmfulness of the international financial crisis, we also need to establish a long-term emergency response mechanism to minimize losses and control risks in the event of a sudden financial crisis. Within the smallest range. We need to establish a financial crisis emergency organization system, and formulate and deploy financial emergency response plans and their implementation.

Conflicts and coordination of financial stability and financial stability

Monetary policy instruments, the basic instrument used to maintain price stability, can sometimes also be used to promote financial stability. In the long run, price stability and financial stability are mutually reinforcing. However, in the short term, when the central bank provides liquidity assistance to problematic financial institutions in order to prevent systemic crises, the base currency is correspondingly expanded, with inflationary effects, which will affect price stability and the independence of the central bank's monetary policy. Sex. From the perspective of China's national conditions, when the central bank exercises the function of lender of last resort, its decision-making basis is often not whether the problematic institution will cause systemic financial risks, but whether the problematic institution's failure will cause social instability. When the central bank provided reloans to insolvent institutions to redeem natural person deposits to ensure social stability, the central bank replaced the finances to a certain extent in performing its public functions of maintaining social stability. The potential conflict with price stability caused by this misplacement of the function of the lender of last resort cannot be ignored.

Coordination mechanism between the Central Bank of Financial Stability and various regulators

The main problem is the information sharing mechanism and the financial stability coordination mechanism. At present, in the process of investigation, collection, and analysis of various financial business activities in China, various regulatory agencies have adopted different standards and priorities, and they have different levels of attention to risks. The quality is not high. Effective information exchange mechanisms have not been established between various departments, and it is difficult to achieve efficient and timely information sharing. However, the significance of the timeliness and accuracy of financial information for the central bank is not only reflected in the formulation and implementation of monetary policy, but more importantly in the treatment of financial risks and financial crises. In addition, timely communication and coordination on financial stability issues is also very important. At present, because we have not established a coordination mechanism, the prominent problems in the work are: First, when the central bank and the various regulators have different views and evaluation methods on financial stability, they are in the middle of some central financial issues. Bank policies and measures are difficult to implement. Second, on the issue of assistance to financial institutions with liquidity risks and withdrawal from the market, the central bank and various regulatory agencies may have different views on the risk assessment of financial institutions.

The establishment and improvement of financial stability compensation mechanism for financial stability

International experience shows that the deposit insurance system, securities investor compensation system and life insurance insurer compensation system are forming an effective financial institution market withdrawal mechanism, reducing the government's rescue burden, curbing the "domino effect" caused by the failure of individual financial institutions, and reducing the system. Sexual financial risk plays an irreplaceable role. The financial safety net should consist of three major elements: prudential supervision, risk compensation mechanism, and the function of the central bank's last lender. From the perspective of the development trend of China's financial industry, the establishment of a market-based risk compensation mechanism is conducive to giving full play to the power of market constraints, preventing moral hazard, and helping to prevent the transmission and spread of run-through risks of financial institutions. A "firewall" has been established between financial institutions.

At present, there is still controversy in the world about establishing a risk compensation mechanism. The experience of some countries shows that improperly designed and operated risk compensation mechanisms may also induce moral hazard issues, further exacerbating financial risks and financial crises. In a complete market economy, investors should be responsible for their investment behavior. Under implicit government guarantees or full risk compensation mechanisms, financial institutions may be involved in excessive risk, and depositors may have little or no incentive to monitor and restrict excessive speculation by financial institutions, thereby triggering high moral hazard. In the past, in China, the government, as the "last guarantor" of state-owned banks, actually assumed the obligation to protect the legitimate interests of depositors. State-owned banks rely on the government's implicit guarantees, and have an inherent motivation for excessive involvement in high-risk, high-yield areas. In the event of a payment crisis, the risk is passed on to the government. Now, from the implicit government guarantee to exploring the risk compensation mechanism of limited compensation, it will help to overcome this moral hazard. In addition, during the period of economic transition in China, the financial burden is heavy and public funds are insufficient. The central bank should "pay for the mechanism" and work with other departments to establish effective risk compensation mechanisms to reduce systemic financial risks.