Sustainable Development Of Financial Innovation

---- Speech delivered by Disciplinary Commissioner Wang Huaqing at the Treasury Markets Summit

Distinguished guests, ladies and gentlemen,

The global financial crisis is of great influence on promoting the reflection and reform of global financial supervision. After the crisis, financial innovation has been severely challenged by credit derivatives, securitization and other structured products; the problem of development standard has also drawn broad attention and provoked deep thinking. Today l would like to share some of my opinions with you.

Essentially, the financial crisis has reflected the financial structural imbalance of global economy, including the imbalance between virtual and real economy, credit and capital market, government supervision and market regulation, and between business interests and social responsibilities. The crisis has given us a serious lesson, i.e. all financial innovation should be developed on the basis of real demand in the economy and the financial market in accordance with the development of national economy and consumers’ financial maturity, and under effective supervision.

History has shown us that even the innovation of complicated financial derivatives originated from the market environment and the need to develop real economy. For example, the frequent outbreak of credit crises in the 1980s in US led to strong market demand for credit risk transfer instruments, which gave rise to the development of such innovative products as credit derivatives and securitization products, etc. However, due to excessive development and market abuse, coupled with deregulation, these innovative products grew far beyond real market demand and finally triggered the latest global financial crisis. Hence, it should be recognized that the prerequisite for financial innovation is to bring risks under control with cautious supervision so as to protect public interests. This requires not only highly disciplined financial institutions but also scientific and effective supervision.

The CBRC adheres to the following principles regarding the supervision on financial innovation of commercial banks. First of all, simplicity, practicality and transparency. We guarantee that the manner of financial innovation and product structure will be kept simple with limited number of products; information should be fully disclosed, avoiding unreasonable affiliated transactions and other risks. Secondly, controllable risk. Global experiences have shown us that financial innovation of the banking sector was both demanded in the market, as well as made on unreasonable impulse.  Thirdly, emphasis on regulation. Financial innovation should be developed within the standard regulation framework. Fourthly, emphasis on core business. We strongly preclude the unreasonable behavior of developing financial innovation for its own sake.

Through contracts and cash flow arrangements, financial derivatives and structured products can restructure the risk and optimize the efficiency of financial resources allocation. The original purpose is to distribute and hedge risks while reducing the transaction cost. Under proper application and supervision, they can greatly contribute to market resources allocation. For China, development of derivatives and structured products is an important way for financial institutions to expand business fields, enhance fee-based income, and improve competency in the global financial market. However, we cannot ignore the facts that infrastructural facilities of derivatives and structured products market still need to be optimized, the information disclosure mechanisms are not perfect and that there are few market participants. For China, future innovation and development of derivatives and structured products should draw in experiences from other countries’ and combine them with the facts in China’s market. The first is to establish clear regulations on the standardized structure of products, margins, centralized clearing, and information disclosure, so as to enrich diversified products. The second is to strengthen the construction of infrastructural facilities, construct various yield curves, accumulate fundamental databases, gradually promote market-based reform of interest rate to facilitate product pricing mechanisms. The third is to improve the overriding environment of derivatives market as well as the maturity and proficiency of market participants. As the main driver of financial innovation, financial institutions in the banking sector should take responsibility to carefully assess consumers’ risk tolerance and adaptability while disclosing relative information and risk.

 This financial crisis gave us serious lessons but also brought us precious management skills and opportunities. It still has great impact on our society and economy even though the crisis has subsided to some extent. At a moment like this, the convening of the Treasury Markets Summit is very meaningful and I hope that this summit can make contribution to promoting risk management and sustainable development of global financial innovation.

          Last but not least, I wish the summit a great success! Thank you!

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