One of the most influential tools in any economy is its financial system, which is composed of closely interconnected financial institutions, regulations, markets, transactions and instruments. According to Adrian and Shin (2008), a study of various economies, confirms wide difference in the nature and structure of their financial systems even among those at similar stages of economic development. This paper analyses the similarities and the differences that exists between the American financial system and that of the China.
Background of the American Financial system
The history of the American financial systems traces back to the European settlement in the US by the 18th century. Since then, it has grown to be the most magnificent in size, scope and efficiency across the globe. Since the introduction of government regulations on the financial institutions the 1930s, by the US Congress, the US financial system has experienced steady growth. Generally, the US financial system is composed of a wide range of financial intermediaries and markets, largely interconnected with the larger global financial systems. The regulations governing the US financial system has constantly been reorganized, following the recent financial crises that hit the US economy in 2008. The regulatory bodies of the US financial system is wide and extensive (Klein & Olivei 2008).
The Federal Reserve
The Federal Reserve is the US central bank responsible for regulating the overall US monetary and banking system and the holding companies. The core business of the Fed is to promote the economy and stability of prices. The Fed operates through several other functional bodies (Levine, 2010).
The Board of Governors to the Fed, commonly called the Federal Reserve Board, mainly guides the monetary policy by working in liaison with the Federal Open Market Committee and the Regional reserve banks. The board is responsible for a wide range of financial and economic research and overseeing the US government systems payments, monitoring the financial services industry, regulating the amount of reserve each bank should have, closely supervising the activities of the regional reserve banks.
One of the most important regulatory tools in the US Federal Reserve system is the Federal Open Markets Committee (FOMC), whose primary role is to make monetary policies for the Fed. The FOMC is composed of twelve members: seven members drawn from the Board of Governors, and includes the president of the New York Federal Reserve Bank, and the presidents of four other regional banks. The FOMC assesses the economic and financial setting and provides a guideline for the "federal funds rate, as the benchmark for national interest rate on loans by commercial banks.
The Reserve Banks is another strong arm of the US Reserve regulatory system in its financial model. The Federal Reserve banking system is made up of 12 regional reserve banks, with a total of 25 branches which essentially are regional arms of the Fed, intermediating between local banks and the U.S. reserve banking system. Not only do they store and distribute reserves, but they also clear commercial papers, checks and all other interbank payment mechanisms. The Reserve banks closely supervise the operations of commercial banks within their jurisdictional regions. Fundamentally, the Reserve banks behave like stockholders of Federal Reserve holding at least 3 % of their capital in the Central bank. Although the Federal Reserve has another class of collaborating with banks, the Reserve banks have additional regulatory powers (Klein & Olivei 2008).
Department of the Treasury
While the Federal Reserve manages payments, The US department of Treasury is concerned with the government revenues. Its other additional roles include recommending and approving all adjustment on the fiscal policies, regulating imports, and exports, responsible for tax and revenue collections and production of the national US currency. The functions of the Department of Treasury are executed by the Office of the Comptroller of the Currency and the Office of the Thrift Supervision, who mainly regulate the banks savings and loans.
The Office of the Comptroller of the Currency (OCC) ensures stability in the banking system by closely monitoring bank loans and investment portfolios, and all other banks' activities that relate to liquidity, capital, earnings, and sensitivity to market risks. The OCC enforce and ensure compliance to the banking laws.
Office of Thrift Supervision (OTS) is charged with controlling non-bank financial institutions. They include federally-chartered savings and loan organizations commonly called "thrifts." Thrifts are concerned with control over large savings deposits, and in other cases issue mortgages. Thrifts are often mutually held, and thus the involved members have a lot of influence on management and financial practices. The OTS vets the formation, management, and operations of thrifts.
Securities and Exchange Commission
This is an independent government agency responsible for regulating the operations of the security markets. It regulates trading securities such as stocks and options and promotes transparency in securities markets. Created in 1934, the commission supervises corporate takeovers.
Federal Deposit Insurance Corporation
This is an insurance corporation created in 1933, to mitigate the US population against individual, saving losses during solvency, collapse, or liquidation. The underwriter insures member banks' holdings in checks and savings. It is also a regulatory agency in the financial system in that it ensures member banks and Non-bank financial institutions meet certain set requirements for them to qualify for FDIC cover (Klein & Olivei 2008).
Commodities Future Trading Commission
Founded in 1974, the CFTC provides a regulatory policy for the increasingly complex hybrid and derivative market securities such as futures contracts and Options. Though it initially covered the agricultural sector, this market has expanded and traders now speculate on the future prices of currencies, stocks, and government securities.
National Credit Union Administration
Functioning like the FDIC and the OCC, the NCUA, monitors credit unions.
Background of the Chinese financial system
China's financial system was formally developed before 1949, but is traceable back to the 17th century, during the Ming Dynasty. The first company law was introduced in China by the newly formed Ministry of Commerce. The law was intended to spur China's industrial development. The evolution of Shanghai as an Asian and China's financial center stemmed the growth and expansion of China's financial system between the late 19th Century and the early 20th century (Chan et al, 2007).
Institutional overview of China's financial system
Since the adoption of the Open Door policy, in 1978, the China's banking sector still reveals a centrally planned economy with high government regulatory framework at all levels. Like the US financial system, China's domestic banking system continues to be the main financial intermediary between savers and investors. Although the stock and bond markets is experiencing tremendous growth, its role in the financial system is still limited (Boyreau-Debray & Shang-Jin, 2005).
The China's banking sector
The China's financial system has four types of banks, which include state owned commercial banks, credit cooperatives, foreign banks, and commercial banks, which are at least private. Wholly state-owned banks include only four largest state-owned commercial banks and those banks collaborating with regulators i.e. policy banks. The four commercial banks account for 60% of the sectors total assets.
The four commercial banks include the Agricultural Bank of China, which provides loans to the agricultural and rural sectors. Bank of China (BOC) is tasked with monitoring international transactions such as foreign exchange and international trade and credit. The China Construction Bank (CCB) is concerned with sponsoring construction and national infrastructure projects. Finally, Industrial & Commercial Bank of China (ICBC) provides working capital in the form of loans to the industrial and commercial sectors of the Chinese urban areas.
It important to note that all the four banks have expanded beyond their original mandate since 1994, when Chinese authorizes introduced the so-called policy banks that took over the state-lending role of the big four's. The 'big four' now engage in commercial lending (Klein & Olivei 2008).
Policy banks
Three policy banks were created in 1994 to lend state directed funds on behalf of the 'big four'. They include Agricultural Development Bank of China (ADBC), China Development Bank (CDB), and Export-Import Bank of China (EIBC). These Policy banks raise their revenues largely through bonds. They also accept restricted deposits. With control of over 10 % of assets in the financial industry, the three policy banks have grown tremendously since formation (Chan et al, 2007).
Non-bank financial institutions (NBFIs)
The China's financial system has three primary types of NBFIs whose combined assets account for at least 1% of the total assets in the industry. Trust and investment companies (TICs), Finance Companies, and Leasing Companies contuse the NBFIs. Some of these financial institutions work closely with provincial governments and are the major players of real estate investments in their regions. The central government however monitors closely the operations of these institutions limiting their scope of business operations.
Securities companies, asset management firms and insurance company's continue to offer financial services. They have played an important role in the financial system.
Stock and bond markets
Stock market:
Established in late 1990, Shanghai and Shenzen Stock exchanges provide opportunities for state owned companies to restructure and raise additional funds from the public. They still play a limited role in corporate finance than the role played by the bank loans. By the end of 2002, the market capitalization of the two stock markets was 45.2% of GDP, while bank loans exceeded 123% of GDP (Klein & Olivei 2008).
Bond market
China's local bond market is the second biggest domestic bond markets in the world after Japan. This bond market is closed to foreign investment. Major players in the bond market include commercial banks, the State, and licensed NBFIs.
Regulatory agencies
The China's financial system is one of most regulated model in the world with heavy government involvement. Unlike the US market model, the China model is a bank-based model
China Banking Regulatory Commission (CBRC)
CBRC is an institution in charge of the banking sector. It is tasked with protection of depositors'and consumers' interests in the banking institutions. CBRC make polices that facilitate restructuring of the highly complex sector. It anticipates, plans and facilitates the domestic industry's partnerships with foreign and the other domestic sectors of the financial system.
People's Bank of China (PBC)
The PBC is the China's Central bank with extensive supervisor powers in monetary policies. Although, CBRC is tasked with supervising the financial institutions, the PBC lays down the interest rate brackets for loans and deposits. PBC plays other monetary supervision roles such as providing guidelines on reserve requirement level and other liquidity tools, regulating banks' lending and credit extension (Boyreau-Debray & Shang-Jin, 2005).
The PBC is concerned with monetary polices in the financial systems, a role that is performed by the Fed Reserve Board in the US model.
State Administration of Foreign Exchange (SAFE)
SAFE is tasked with regulation of all the foreign exchange transactions. It plans and administers all policies governing foreign exchange reserves and exchange rates and external debts.
China Securities Regulatory Commission (CSRC)
Set up in 1997, Chan and others (2007) allude that the CSRC regulates and supervises the securities market. The CSRC enforces security market laws ensuring listed companies comply. The agency approves issuance of shares. Unlike the American model, the heavy government involvement has raised concerns over politicization of the stock market. The CSRC protects investors' assets in the market through enacted and enforced stricter rules, on the market participants; that increases their transparency.
China Insurance Regulatory Commission (CIRC)
The CIRC is supervises the operations of insurance firms in the in industry. It ensures that the firms conform to the regulations and that the sector is open to foreign players (Boyreau-Debray & Shang-Jin, 2005).
