Scientific Research Project of the Youth of the Chinese Academy of Social Sciences: Pro-cyclical research of financial supervision system

    Presenter: Yin Zhentao

    From financial crisis, under the complex financial system, traditional financial regulatory system or micro-prudential regulation has difficulty undertaking the task of maintaining financial stability, which has caused pro-cyclicality as well, making itself a factor influencing financial stability. At the beginning of the subprime mortgage crisis, the loss of the subprime mortgage market was not big. However, according to the requirement of capital adequacy, the bank had to offset and cancel losses after verification. But for banks, the only way to compliant requirement was to reduce the loans towards enterprises and individuals. Since the market would be lack of liquidity when the bank lost its normal financing functions, tightening operation of the bank accelerated the collapse of the market and the upgrade of the crisis when the market was in great need of energy and support, leading to global economic recession. Therefore, there should be a set of effective counter-cyclical mechanism in the financial system by means of the implementation of appropriate counter-cyclical policies against pro-cyclical effects of financial regulatory policies and pro-cyclical behaviors of financial institutions as well as periodic economic fluctuation, if we plan to carry on effective financial regulation and emphasize the role of the macro-prudential regulation and the cooperation with micro-prudential supervision. At the same time, it is also necessary that some measures such as easing the pro-cyclical effects of external rules of regulation and accounting and reducing intrinsic pro-cyclicality of financial system with the impact of incentive mechanism and behavior pattern of financial institutions should be taken actively.