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Globalization is a common challenge. It should be channeled or managed cooperatively. As a new member of the WTO and the global trade leadership community, China has the chance to shape globalization, not merely to be shaped by it.
V. Basel Agreement and New Basel Capital Agreement
1. Evolvement of Basel Committee on Banking Supervision and New Basel Capital Agreement and its impact on international banking
The Basel Committee on Banking Supervision is an institution created by the central bank Governors of the G-10 nations. It was created in 1974 and meets regularly four times a year. The Basel Committee formulates broad supervisory standards and guidelines and recommends statements of best practice in banking supervision in the expectation that member authorities and other nation''s authorities will take steps to implement them through their own national systems, whether in statutory form or otherwise.
Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide. It seeks to do so by exchanging information on national supervisory issues, approaches and techniques, with a view to promoting common understanding. At times, the Committee uses this common understanding to develop guidelines and supervisory standards in areas where they are considered desirable. In this regard, the Committee is best known for its international standards on capital adequacy; the Core Principles for Effective Banking Supervision; and the Concordat on cross-border banking supervision.
The Basel II Framework describes a more comprehensive measure and minimum standard for capital adequacy that national supervisory authorities are now working to implement through domestic rule-making and adoption procedures. It seeks to improve on the existing rules by aligning regulatory capital requirements more closely to the underlying risks that banks face. In addition, it is intended to promote a more forward-looking approach to capital supervision, one that encourages banks to identify the risks they may face, and to develop or improve their ability to manage those risks.
Basel II uses a "three pillars" concept - (1) minimum capital requirements, (2) supervisory review and (3) market discipline - to promote greater stability in the financial system. The Basel I accord dealt with only parts of each of these pillars. For example: of the key pillar one risk, credit risk, was dealt with in a simple manner and market risk was an afterthought. Operational risk was not dealt with at all.
The first pillar deals with maintenance of regulatory capital calculated for three major components of risk that a bank faces: Credit Risk, Operational Risk and Market Risk. The second pillar deals with the regulatory response to the first pillar, giving regulators much improved ''tools'' over those available to them under Basel I. It also provides a framework for dealing with all the other risks a bank may face, such as reputation risk, liquidity risk and legal risk, which the accord combines under the title of residual risk. The third pillar greatly increases the disclosures that the bank must make. This is designed to allow the market to have a better picture of the overall risk position of the bank and to allow the counterparties of the bank to price and deal appropriately. It can be illuminated by the chart below.
Hence the new Basel Capital Accord comprises three mutually reinforcing pillars with a view to better safeguarding the stability of the national and international banking system. However, Basel New Capital Agreement will increase the capital requirements in developing countries as a whole, making some adverse affect on capital flows in developing countries. In some degree, it will put emerging countries’ banking into an adverse competition status, especially to their abroad branches and affiliations. Basel II will also have an impact on regulatory systems across countries and on the BCP. Monitoring of the effectiveness of banks’ risk management practices will take a more prominent place under Basel II, as well as the effectiveness of the supervisory review process, disclosure and market discipline.
2. Core Principles for effective banking supervision
International recognition of the need for strong, effectively-supervised banking systems is the reason that the Basle Supervisors Committee issued its 1997 paper, "Core Principles for Effective Banking Supervision." (BCP)
The Basel Core Principles comprise 25 basic principles that need to be in place for a supervisory system to be effective. The principles relate to: objectives, autonomy, powers and resources; licensing and structure; prudential regulations and requirements; methods of ongoing supervision; information requirements; remedial methods and exit and cross-border banking. In addition to the principles themselves, the document contains explanations of the various methods supervisors can use to implement them.
One of the key objectives of the BCP is to contribute to international financial stability. The Basel Committee believes that achieving consistency with the Core Principles by every country will be a significant step in the process of improving financial stability domestically and internationally. In many countries, substantive changes in the legislative framework and in the powers of supervisors will be necessary because many supervisory authorities do not at present have the statutory authority to implement all of the Principles. In such cases, the Basel Committee believes it is essential that national legislators give urgent consideration to the changes necessary to ensure that the Principles can be applied in all material respects.
VI. Conclusion
Dangers and Prospects
Weakness in the banking system of a country, whether developing or developed, can threaten financial stability both within that country and internationally. The need to improve the strength of financial systems has attracted growing international concern. It is clear that instability in systemically significant countries can spill over to other countries, either on a regional level or globally.
The global trading system faces danger. The working group on WTO accession reached a compromise with China establishing somewhat lower than normal permissible criteria for safeguards over the next 15 years. WTO member governments can impose "safeguards" against China—temporary import restraints in response to import surges. Furthermore, Taiwan has long since met the conditions for WTO membership, but China has not formally signaled its acquiescence. A belligerent attitude could stir up more anti-China sentiment in the U.S. Congress.
How the United States and its major allies handle the pressures associated with China''s ongoing lurch toward globalization will influence not only the effectiveness of the WTO and the health of the Chinese economy, but also, more broadly, the future of U.S.-China relations, the evolution of China''s political system, and the fate of Asia.
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