Improving China's Bank Regulation to Avoid the Asian Bank Contagion

Abstract

IMPROVING CHINA'S BANK REGULATION TO AVOID THE ASIAN BANK CONTAGION Michael E. Burke, IV* The People's Republic of China (PRC or China') must re- form its bank regulations to avoid the systemic bank shocks that have seriously disrupted the economies and banking sectors in Indonesia, Korea, and Thailand. The failure of bank regulations in Indonesia, Thailand, and Korea to conform to international best practices is a direct cause of the Asian financial crisis (Cri- sis). China should bring its bank regulations in line with interna- tional best practices , including prudential regulation of risk management and licensing and oversight of bank operations, in order to protect its banking sector from the Crisis. The Crisis may be the most important and interesting law and economics story of the 1990s. The nations affected by the Crisis have a common history of inadequate regulation and gov- ernment interference in the banking sector. 2 Structural reform, especially legal reform, is an important component of the Inter- national Monetary Fund's (IMF) strategy to restore economies * B.S.F.S., 1993, Georgetown University School of Foreign Service; J.D., 1998, Georgetown University Law Center. Mr. Burke is an associate in the Seattle office of Perkins Coie, LLP. The author would like to thank his wife for her support throughout the drafting of this article. 1. Note that this article specifically excludes the banks in the Hong Kong Spe- cial Administrative Region of the People's Republic of China. Hong Kong banks are known to be well-run and efficiently regulated; only those banks inside the pre- 1997 borders of the People's Republic of China are the focus of this article. Further, this article does not attempt to ascertain the effect of the Year 2000 (Y2K) computer bug on bank operations in the People's Republic of China or elsewhere in Asia. Y2K issues certainly would make an interesting law journal article, but are outside the scope of this article. 2. TIMOTHY LANE ET AL., IMF-SuPPORTED PROGRAM IN INDONESIA, KOREA, AND THAILAND: A PRELIMINARY ASSESSMENT 17 (1999) [hereinafter PRELIMINARY IMF REPORT]. The interference included promotion of the domestic economy through policy loans, guarantees for corporate debtors that obviated the need for adequate risk assessment, lax regulatory framework, implicit guarantees on bank liabilities, connected lending, and a lack of sound standards for sound banking oper- ations. Id. at 19.