## 5. Stylized Models for Macroprudential Policy

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---

### I. Introduction — systemic risks and need for coordination
- Financial interconnectedness across corporations, households, governments, and financial institutions has increased, accelerating cross-sector spillovers and highlighting the need for proactive macroprudential policy and coordination among macroprudential and microprudential regulation, fiscal and monetary policies.
- China’s rapid structural change in the financial sector is being driven by:
  - A slower trend of economic growth.
  - Financial liberalization.
- Main questions addressed:
  - How has China’s financial landscape changed?
  - What are the growing financial interlinkages associated with the changing financial landscape?
  - How can institutional arrangements for coordination be improved to address potential systemic risk?
- Two priority coordination areas identified:
  - Legalize data collection and sharing among regulators.
  - Strengthen coordinated and comprehensive analysis of systemic risk.

### II. The changing financial landscape in China
- Driving forces and implications:
  - The slowdown of economic growth:
    - Post-boom sectors exhibit overcapacity, declining profit, and high leverage.
    - Effects on financial system:
      - Increased overall level of risk.
      - Banks expand off-balance-sheet business to circumvent capital and liquidity regulation and to access new clients/asset classes.
      - Government impetus to reform and liberalize the financial system.
  - Financial liberalization across interest rate, exchange rate and capital account; financial institutions reform; financial markets development.
    - Interest rate liberalization accompanied by rapid growth of off-balance-sheet financing, notably wealth management products (WMPs).
    - Example: WMPs paid around 5 percent vs regulated deposit rate of 2–3 percent; investors generally receive expected returns despite most WMPs not formally guaranteeing returns.

- Key empirical indicators (preserve source numbers exactly)
  - WMPs growth (in trillions of yuan):
    - 2007: 0.5
    - 2008: 0.8
    - 2009: 1.8
    - 2010: 3.0
    - 2011: 4.6
    - 2012: 7.1
    - 2013: 10.2
    - 2014: 15.0
  - Bank assets (in trillions of yuan):
    - 2007: 52.6
    - 2008: 62.4
    - 2009: 78.8
    - 2010: 95.3
    - 2011: 113.3
    - 2012: 133.6
    - 2013: 151
    - 2014: 172.3
  - WMPs/Bank assets (in percent):
    - 2007: 1.0
    - 2008: 1.3
    - 2009: 2.3
    - 2010: 3.1
    - 2011: 4.1
    - 2012: 5.3
    - 2013: 6.7
    - 2014: 8.7
  - Major nonbank financial institutions: assets under management (trillions of yuan; share of GDP in percent)
    - Money Market Mutual Fund:
      - 2012: 0.7 (1.3)
      - 2013: 0.9 (1.6)
      - 2014: 1.9 (3.0)
    - Trust Firm:
      - 2012: 7.5 (14.4)
      - 2013: 10.9 (19.2)
      - 2014: 14.0 (22.1)
    - Brokerage Firm AMC:
      - 2012: 1.9 (3.6)
      - 2013: 5.2 (9.1)
      - 2014: 7.95 (12.5)
    - Asset Management Corporation TAMC:
      - 2012: 3.6 (7.0)
      - 2013: 4.2 (7.4)
      - 2014: 5.9 (9.3)
    - Total:
      - 2012: 13.7 (26.3)
      - 2013: 21.2 (37.3)
      - 2014: 29.7 (46.9)
  - Financial markets developments:
    - Domestic bond issuance: 2011: 7 trillion yuan → 2014: 11.9 trillion yuan.
    - Repo market: 2011: 112.1 trillion yuan → 2014: 213.6 trillion yuan.

- Five implications of slowdown + liberalization for China’s financial landscape
  - The financial system is larger:
    - Financial assets in China reached $35 trillion in 2013, accounting for 13 percent of global financial assets and 371 percent of China 2013 GDP.
  - The system is more diversified:
    - Total Social Financing (TSF) composition:
      - 2008: bank loans 87 percent; off-balance-sheet and nonbank 13 percent.
      - 2014: bank loans 69 percent; other channels 31 percent.
  - The system is more interconnected via off-balance-sheet channels and nonbank institutions.
  - Leverage has increased through implicit guarantees (e.g., perceived bank support for WMPs and trust products).
  - Higher risk of asset bubbles as institutions search for yield and concentrate capital flows.

### III. Financial linkages associated with the changing landscape
- A. The housing market
  - Housing price dynamics:
    - Housing prices rose strongly over two decades with dips in 2008–09 and 2012; in 2012 Chinese increases outpaced Korea’s 2012 boom and exceeded U.K./U.S. pre-2008 booms.
  - Real estate lending:
    - Real estate loans (development loans and mortgages) quadrupled from 3.7 trillion yuan in 2006 to 17.4 yuan trillion in 2014.
    - Real estate loan share of total bank loans rose from 15 percent in 2006 to 20 percent in 2014.
    - Real estate loans accounted for the largest sectoral share among 96 industries—10 percentage points higher than the second industry.
  - Local government financial platforms (LGFPs):
    - Stock of local government debt: 10.72 trillion yuan in 2010 → 24 trillion yuan at end-2014 (a 66.9 percent hike).
    - Of total LGFP debt: 23.5 percent invested in land reserves and social housing; 37.2 percent guaranteed to be paid back by land sales revenue.
    - Estimated that 87 percent of LGFPs’ loans are related to real estate.
  - Risks and transmission channels:
    - Mortgage and developer loan losses can damage bank balance sheets.
    - Declines in land and housing prices impair LGFPs’ repayment capacity and bank asset quality.
    - Price deviations larger in Beijing, Nanjing, Shanghai, and Shenzhen.

- B. The stock market
  - Market episode and volatility:
    - China’s equity market rose by more than 150 percent from June 2014 to June 2015, followed by a sharp 50 percent decline in 2015.
    - Market volatility higher than peers (volatility figure referenced).
  - Interconnectedness with banks and nonbanks:
    - Margin financing:
      - Margin trading balance increased from about 0.6 trillion yuan in September 2014 to 2.2 trillion yuan by June 2015.
      - Comparison: U.S. margin balance ≈ 2 percent free-float market cap stable; China’s margin balance reached 10 percent at its peak (4 percent in terms of total market cap).
      - Margin financing funded by WMPs, interbank lending, brokerage firm bond issuance, asset management firms, and trust firms.
    - Stock collateralized lending:
      - Total value of collateralized stocks reached 2,000 billion yuan by end-June 2015.
      - Pledge distribution: 60 percent to brokers, 20 percent to banks, 10 percent to trust companies.
    - Investment vehicles channeling bank WMPs to stocks:
      - Umbrella trusts:
        - Senior tranche fixed return around 8–9 percent; junior tranche residual return; leverage for junior tranche about 2–5.
        - Scale as of June 2015: 480 billion yuan.
      - Stock benefit swaps:
        - Launched 2013; around 20 brokers approved; leverage around 2–4; margin call triggers on price drops.
    - Interbank lending and bank credit channel:
      - Brokerage firms and large asset managers borrow short-term from banks; anecdotal evidence of historic high average daily borrowing by March 2015.
      - Some commercial and consumer loans likely flowed into stock market despite CBRC regulations forbidding bank loans to invest in stocks.
    - Nonbank leverage channels:
      - Structured mutual fund companies: estimated >400 billion yuan; leverage around 2–3.
      - Offline private fund matching companies: leverage up to 8–9; interest rates up to 20 percent annualized (size opaque).
      - Online fund matching (peer-to-peer + HOMS system): size over RMB 300 billion before collapse.

- C. Shadow banking
  - Definition articulation:
    - Shadow banking: funding that uses nonstandard debt instruments via nonbank financial intermediaries and bank off-balance-sheet.
    - Nonstandard instruments: trust loans, entrusted loans, undiscounted bank acceptances (not traded in interbank market/exchange).
    - Nonbank intermediaries: trust companies, security asset management departments and fund subsidiaries, wealth management firms, guarantors, etc.
  - Benefits identified:
    - Develops capital markets and reduces reliance on banks.
    - Diversifies banking risks.
    - Facilitates financial reform and helps relieve liquidity shortages temporarily.
  - Key risks and concerns:
    - Lack of transparency in many entities (private equity, pawnshops, underground lending).
    - Tight interconnections with commercial banks and corporations; potential for bad debts to migrate to bank balance sheets via repackaging and trust products.
    - Insufficient regulation and supervision for many fast-growing nonbank entities (loan guarantee companies, microfinance companies).
    - Crisis management gaps: no clear mandate to provide liquidity for shadow banking; higher run risk and settlement difficulties.
  - Shadow banking risk categories highlighted (as in source):
    - Lack of transparency; maturity mismatch; credit risk; liquidity risk; market risk; policy risk; customer default risk; regulatory crackdown; property market collapse.

### IV. Current institutional arrangements
- Three-level framework for financial stability:
  - High level: regular meetings of top leaders of supervisory authorities and related ministers chaired by the State Council.
  - Middle level: regular meetings of monetary policy committee and supervisory authorities for coordination.
  - Low level: regular communications between regulators and regulated institutions.
- Legal and institutional responsibilities:
  - Law of the People’s Bank of China (amended 2003) gives PBC responsibility for guarding against systemic financial risk and maintaining financial stability.
  - PBC actions:
    - Implemented the Deposit Insurance Act in May 2015.
      - Deposit Insurance Act detail: up to 500,000 yuan in deposits per bank insured; more than 99% of depositors would be covered.
    - Put in place Macro Prudential Assessment framework and differentiated reserve requirements; leads inter-agency coordination via Financial Crisis Response Group and Financial Regulatory Coordination Joint Ministerial Committee (JMC).
  - Other agencies:
    - China Banking Regulatory Commission (CBRC): prudential regulator of commercial banks.
    - China Securities Regulatory Commission (CSRC): regulates securities and futures markets.
    - China Insurance Regulatory Commission (CIRC): regulates insurance industry.
    - Ministry of Finance and State Administration of Foreign Exchange are important for fiscal and external backstops.
- Coordination mechanisms and gaps:
  - MOUs exist among CSRC, CBRC, CIRC; PBC has Interim Rules on Information Sharing.
  - Joint financial stability coordination mechanism and formal quarterly Joint Working Meetings established in late 2013.
  - Weaknesses identified:
    - Insufficient cross-sector granular data collection and sharing; data on match-funding in the stock market missing.
    - Insufficient cross-sector analysis of systemic risk; Financial Stability Report (FSR) could better analyze interconnectedness and present deeper discussion and indicators.
    - Insufficient policy coordination across monetary, fiscal, and macroprudential tools; potential for agencies working in silos, especially in tranquil times versus crisis.

### V. Suggestions to improve institutional arrangements to address systemic risk
- Four overlapping key institutional elements to strengthen:
  - Enhanced data collection and sharing.
  - Strengthened analysis on systemic risk.
  - Clear mandate for coordinated and comprehensive analysis.
  - Formal mechanism for coordination or consultation across policies aimed at financial stability.

- A. Enhancing data collection and sharing — specific needs
  - Authorities should have legal powers to collect information across the regulatory perimeter to avoid duplicative costs and close information gaps.
  - Establish an information collection committee or agency with backup powers to collect data directly from financial institutions (conceptually modelled on examples such as the U.S. Office for Financial Research).
  - Priority data to collect systematically:
    - Foreign exchange exposures of the corporate sector.
    - Household debt.
    - Cross-exposures between financial institutions.
    - More granular, frequent, and timely statistical and supervisory data.
    - Comprehensive transactions-based data.

- B. Strengthening analysis on systemic risk — specific actions
  - Regulators should monitor financial risks closely with frequent, balanced policy discussion focused on systemic linkages:
    - Market and liquidity risk may become credit risk.
    - System-wide counterparty risk can trigger fire sales.
    - Reduced risk appetite and rush to safe assets cause contagion.
    - Corporate sector distress can transmit to the financial sector.
    - Declines in nonfinancial asset values increase banking sector credit risk.
  - Create task forces on specific topics (shadow banking, LGFPs, external investment/financing) with cross-agency representation.
  - Improve the Financial Stability Report (FSR):
    - Clarify focus and topics.
    - Collect more detailed information and apply deeper tools.
    - Use stress tests as early warning devices and employ network analysis to model system interconnections.

- C. Setting up institutional arrangements for better coordination — principles
  - Policy coordination needed because financial stability policy interacts with monetary, fiscal, structural, and other financial policies; macroprudential measures should not substitute for necessary macroeconomic adjustments.
  - Upgrade institutional framework to ensure each agency has internally consistent objectives and appropriate tools for their mandates.
  - Facilitate cooperation through suitable institutional models to enable information sharing, joint analysis, and coherent policy responses.

### Degree of institutional integration and recommendations for China
- Institutional arrangements matrix highlights variation in:
  - Degree of institutional integration of central bank and supervisory agencies (Full; Partial; Partial; Partial; No; No (Partial); No; No).
  - Ownership of macroprudential policy mandate (Central bank; Committee “related” to central bank; Independent committee; Central bank; Multiple agencies; Multiple agencies; Multiple agencies; Committee (multinational, regional)).
  - Role of MOF/treasury/government (No; Passive; Active; No; Passive; Active; No; Passive).
  - Separation of policy decisions and control over instruments (No; In some areas; Yes; In some areas; No; No; No; Yes).
  - Existence of separate body coordinating across policies (No; No; No; No; Yes; Yes; No; No).
  - Examples of specific model countries/regions include: Czech Republic; Ireland (new); Singapore; Malaysia; Romania; Thailand; United Kingdom (new); Brazil; France (new); United States (new); Belgium (new); The Netherlands; Serbia; Australia; Canada; Chile; Hong Kong SAR; Korea; Lebanon; Mexico; Iceland; Peru; Switzerland; EU (ESRB).

- Recommendations for China — institutional design and legal changes
  - Strengthen cooperation and information sharing across agencies to address systemic risk while respecting operational autonomy of separate agencies.
  - Consider establishing a dedicated financial stability council that brings together all relevant agencies to address systemic risk.
  - Establish a permanent Financial Stability Committee with a clear mandate to monitor systemic risk and make recommendations.
    - In the case of China, committee membership would include the PBC, the three supervisory agencies, and the MOF.
    - Each agency should be authorized to receive all materially important supervisory information from other agencies.
  - Clarify responsibilities and obligations of respective regulatory agencies in new laws and regulations to require coordination to identify systemic risk by sharing information and strengthening policy coordination.
    - Revise laws, such as the Law of the People’s Bank of China, to involve relevant supervisory and regulatory agencies in the decision-making process (for example, by admitting these agencies to the macroprudential decision-making body).
    - This approach aims to reconcile differences in perspective, foster ownership of decisions made by a macroprudential committee, and increase compliance with the committee’s recommendations by ensuring that powers assigned to agencies can be used in pursuit of financial stability.

### Conclusions on China’s financial stability framework
- China’s financial system has rapidly morphed from an isolated, bank-dominated, and heavily regulated system into an increasingly large, diversified, and interconnected system.
- The transformation:
  - Improved the efficiency of the financial system.
  - Is expected to benefit economic development over the medium term.
  - Has brought new risks as financial institutions face competition pressures to expand into riskier assets and markets while the established regulatory framework has not kept pace.
- Key needs:
  - Closer policy coordination and better information sharing among agencies.
  - Cooperation and coordination of various agencies both in times of crisis and during “good times,” when risks may be germinating.
- Open question:
  - Whether coordination arrangements that are effective in times of crisis are equally well suited to normal operating conditions.

*Source: _wp16181 - 5. Stylized Models for Macroprudential Policy; https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2016/_wp16181.pdf*

### 1. Banks’ Off-Balance-Sheet Financing ..................................................................................

### 1. Banks’ Off-Balance-Sheet Financing

### Main sections / themes
- 1. Banks’ Off-Balance-Sheet Financing ....................................................................................6
- 2. China’s Share of Financial Assets in the World ....................................................................8
- 3. Housing Price Increases .......................................................................................................10
- 5. Shares of Credit in Major Industries (2014) ........................................................................11
- 6. Stock Prices ..........................................................................................................................12
- 7. Stock Market Volatility........................................................................................................12
- 8. Margin Trading Balance ......................................................................................................14
- 9. Interconnectedness of Stock Market ....................................................................................17 

### Tables listed in the content unit
- Table 1. The Size of Banks’ WMPs .....................................................................................................6
- Table 2. The Size of the Major Nonbank Financial Institutions ..........................................................7
- Table 3. Estimates of Interconnectedness between Banks and the Stock Market .............................13
- Table 4. Risks in Shadow Banking ....................................................................................................19

*Source: _wp16181 - 1. Banks’ Off-Balance-Sheet Financing; https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2016/_wp16181.pdf*

### 5. Stylized Models for Macroprudential Policy .......................................................................25

### 5. Stylized Models for Macroprudential Policy

### I. Introduction — systemic risks and need for coordination
- Financial interconnectedness across corporations, households, governments, and financial institutions has increased, accelerating cross-sector spillovers and highlighting the need for proactive macroprudential policy and coordination among macroprudential and microprudential regulation, fiscal and monetary policies.
- China’s rapid structural change in the financial sector is being driven by:
  - A slower trend of economic growth.
  - Financial liberalization.
- Main questions addressed:
  - How has China’s financial landscape changed?
  - What are the growing financial interlinkages associated with the changing financial landscape?
  - How can institutional arrangements for coordination be improved to address potential systemic risk?
- Two priority coordination areas identified:
  - Legalize data collection and sharing among regulators.
  - Strengthen coordinated and comprehensive analysis of systemic risk.

### II. The changing financial landscape in China
- Driving forces
  - The slowdown of economic growth:
    - Post-boom sectors exhibit overcapacity, declining profit, and high leverage.
    - Effects on financial system:
      - Increased overall level of risk.
      - Banks expand off-balance-sheet business to circumvent capital and liquidity regulation and to access new clients/asset classes.
      - Government impetus to reform and liberalize the financial system.
  - Financial liberalization across: interest rate, exchange rate and capital account; financial institutions reform; financial markets development.
    - Interest rate liberalization accompanied by rapid growth of off-balance-sheet financing, notably wealth management products (WMPs).
    - Example: WMPs paid around 5 percent vs regulated deposit rate of 2–3 percent; investors generally receive expected returns despite most WMPs not formally guaranteeing returns.
- Key empirical indicators (preserve source numbers exactly)
  - WMPs growth (in trillions of yuan):
    - 2007: 0.5
    - 2008: 0.8
    - 2009: 1.8
    - 2010: 3.0
    - 2011: 4.6
    - 2012: 7.1
    - 2013: 10.2
    - 2014: 15.0
  - Bank assets (in trillions of yuan):
    - 2007: 52.6
    - 2008: 62.4
    - 2009: 78.8
    - 2010: 95.3
    - 2011: 113.3
    - 2012: 133.6
    - 2013: 151
    - 2014: 172.3
  - WMPs/Bank assets (in percent):
    - 2007: 1.0
    - 2008: 1.3
    - 2009: 2.3
    - 2010: 3.1
    - 2011: 4.1
    - 2012: 5.3
    - 2013: 6.7
    - 2014: 8.7
  - Major nonbank financial institutions: assets under management (trillions of yuan; share of GDP in percent)
    - Money Market Mutual Fund:
      - 2012: 0.7 (1.3)
      - 2013: 0.9 (1.6)
      - 2014: 1.9 (3.0)
    - Trust Firm:
      - 2012: 7.5 (14.4)
      - 2013: 10.9 (19.2)
      - 2014: 14.0 (22.1)
    - Brokerage Firm AMC:
      - 2012: 1.9 (3.6)
      - 2013: 5.2 (9.1)
      - 2014: 7.95 (12.5)
    - Asset Management Corporation TAMC:
      - 2012: 3.6 (7.0)
      - 2013: 4.2 (7.4)
      - 2014: 5.9 (9.3)
    - Total:
      - 2012: 13.7 (26.3)
      - 2013: 21.2 (37.3)
      - 2014: 29.7 (46.9)
  - Financial markets developments:
    - Domestic bond issuance: 2011: 7 trillion yuan → 2014: 11.9 trillion yuan.
    - Repo market: 2011: 112.1 trillion yuan → 2014: 213.6 trillion yuan.
- Five implications of slowdown + liberalization for China’s financial landscape
  - The financial system is larger:
    - Financial assets in China reached $35 trillion in 2013, accounting for 13 percent of global financial assets and 371 percent of China 2013 GDP.
  - The system is more diversified:
    - Total Social Financing (TSF) composition:
      - 2008: bank loans 87 percent; off-balance-sheet and nonbank 13 percent.
      - 2014: bank loans 69 percent; other channels 31 percent.
  - The system is more interconnected via off-balance-sheet channels and nonbank institutions.
  - Leverage has increased through implicit guarantees (e.g., perceived bank support for WMPs and trust products).
  - Higher risk of asset bubbles as institutions search for yield and concentrate capital flows.

### III. Financial linkages associated with the changing landscape
- A. The housing market
  - Housing price dynamics:
    - Housing prices rose strongly over two decades with dips in 2008–09 and 2012; in 2012 Chinese increases outpaced Korea’s 2012 boom and exceeded U.K./U.S. pre-2008 booms.
  - Real estate lending:
    - Real estate loans (development loans and mortgages) quadrupled from 3.7 trillion yuan in 2006 to 17.4 yuan trillion in 2014.
    - Real estate loan share of total bank loans rose from 15 percent in 2006 to 20 percent in 2014.
    - Real estate loans accounted for the largest sectoral share among 96 industries—10 percentage points higher than the second industry.
  - Local government financial platforms (LGFPs):
    - Stock of local government debt: 10.72 trillion yuan in 2010 → 24 trillion yuan at end-2014 (a 66.9 percent hike).
    - Of total LGFP debt: 23.5 percent invested in land reserves and social housing; 37.2 percent guaranteed to be paid back by land sales revenue.
    - Estimated that 87 percent of LGFPs’ loans are related to real estate.
  - Risks and transmission channels:
    - Mortgage and developer loan losses can damage bank balance sheets.
    - Declines in land and housing prices impair LGFPs’ repayment capacity and bank asset quality.
    - Price deviations larger in Beijing, Nanjing, Shanghai, and Shenzhen.

- B. The stock market
  - Market episode and volatility:
    - China’s equity market rose by more than 150 percent from June 2014 to June 2015, followed by a sharp 50 percent decline in 2015.
    - Market volatility higher than peers (volatility figure referenced).
  - Interconnectedness with banks and nonbanks:
    - Margin financing:
      - Margin trading balance increased from about 0.6 trillion yuan in September 2014 to 2.2 trillion yuan by June 2015.
      - Comparison: U.S. margin balance ≈ 2 percent free-float market cap stable; China’s margin balance reached 10 percent at its peak (4 percent in terms of total market cap).
      - Margin financing funded by WMPs, interbank lending, brokerage firm bond issuance, asset management firms, and trust firms.
    - Stock collateralized lending:
      - Total value of collateralized stocks reached 2,000 billion yuan by end-June 2015.
      - Pledge distribution: 60 percent to brokers, 20 percent to banks, 10 percent to trust companies.
    - Investment vehicles channeling bank WMPs to stocks:
      - Umbrella trusts:
        - Senior tranche fixed return around 8–9 percent; junior tranche residual return; leverage for junior tranche about 2–5.
        - Scale as of June 2015: 480 billion yuan.
      - Stock benefit swaps:
        - Launched 2013; around 20 brokers approved; leverage around 2–4; margin call triggers on price drops.
    - Interbank lending and bank credit channel:
      - Brokerage firms and large asset managers borrow short-term from banks; anecdotal evidence of historic high average daily borrowing by March 2015.
      - Some commercial and consumer loans likely flowed into stock market despite CBRC regulations forbidding bank loans to invest in stocks.
    - Nonbank leverage channels:
      - Structured mutual fund companies: estimated >400 billion yuan; leverage around 2–3.
      - Offline private fund matching companies: leverage up to 8–9; interest rates up to 20 percent annualized (size opaque).
      - Online fund matching (peer-to-peer + HOMS system): size over RMB 300 billion before collapse.

- C. Shadow banking
  - Definition articulation:
    - Shadow banking: funding that uses nonstandard debt instruments via nonbank financial intermediaries and bank off-balance-sheet.
    - Nonstandard instruments: trust loans, entrusted loans, undiscounted bank acceptances (not traded in interbank market/exchange).
    - Nonbank intermediaries: trust companies, security asset management departments and fund subsidiaries, wealth management firms, guarantors, etc.
  - Benefits identified:
    - Develops capital markets and reduces reliance on banks.
    - Diversifies banking risks.
    - Facilitates financial reform and helps relieve liquidity shortages temporarily.
  - Key risks and concerns:
    - Lack of transparency in many entities (private equity, pawnshops, underground lending).
    - Tight interconnections with commercial banks and corporations; potential for bad debts to migrate to bank balance sheets via repackaging and trust products.
    - Insufficient regulation and supervision for many fast-growing nonbank entities (loan guarantee companies, microfinance companies).
    - Crisis management gaps: no clear mandate to provide liquidity for shadow banking; higher run risk and settlement difficulties.
  - Table of shadow banking risks summarized (as in source): lack of transparency, maturity mismatch, credit risk, liquidity risk, market risk, policy risk, customer default risk, regulatory crackdown, property market collapse (Y indicators in source).

### IV. Current institutional arrangements
- Three-level framework for financial stability:
  - High level: regular meetings of top leaders of supervisory authorities and related ministers chaired by the State Council.
  - Middle level: regular meetings of monetary policy committee and supervisory authorities for coordination.
  - Low level: regular communications between regulators and regulated institutions.
- Legal and institutional responsibilities:
  - Law of the People’s Bank of China (amended 2003) gives PBC responsibility for guarding against systemic financial risk and maintaining financial stability.
  - PBC actions:
    - Implemented the Deposit Insurance Act in May 2015.
      - Deposit Insurance Act detail: up to 500,000 yuan in deposits per bank insured; more than 99% of depositors would be covered.
    - Put in place Macro Prudential Assessment framework and differentiated reserve requirements; leads inter-agency coordination via Financial Crisis Response Group and Financial Regulatory Coordination Joint Ministerial Committee (JMC).
  - Other agencies:
    - China Banking Regulatory Commission (CBRC): prudential regulator of commercial banks.
    - China Securities Regulatory Commission (CSRC): regulates securities and futures markets.
    - China Insurance Regulatory Commission (CIRC): regulates insurance industry.
    - Ministry of Finance and State Administration of Foreign Exchange are important for fiscal and external backstops.
- Coordination mechanisms and gaps:
  - MOUs exist among CSRC, CBRC, CIRC; PBC has Interim Rules on Information Sharing.
  - Joint financial stability coordination mechanism and formal quarterly Joint Working Meetings established in late 2013.
  - Weaknesses identified:
    - Insufficient cross-sector granular data collection and sharing; data on match-funding in the stock market missing.
    - Insufficient cross-sector analysis of systemic risk; Financial Stability Report (FSR) could better analyze interconnectedness and present deeper discussion and indicators.
    - Insufficient policy coordination across monetary, fiscal, and macroprudential tools; potential for agencies working in silos, especially in tranquil times versus crisis.

### V. Suggestions to improve institutional arrangements to address systemic risk
- Four overlapping key institutional elements to strengthen:
  - Enhanced data collection and sharing.
  - Strengthened analysis on systemic risk.
  - Clear mandate for coordinated and comprehensive analysis.
  - Formal mechanism for coordination or consultation across policies aimed at financial stability.
- A. Enhancing data collection and sharing — specific needs
  - Authorities should have legal powers to collect information across the regulatory perimeter to avoid duplicative costs and close information gaps.
  - Establish an information collection committee or agency with backup powers to collect data directly from financial institutions (modelled on examples such as the U.S. Office for Financial Research in concept).
  - Priority data to collect systematically:
    - Foreign exchange exposures of the corporate sector.
    - Household debt.
    - Cross-exposures between financial institutions.
    - More granular, frequent, and timely statistical and supervisory data.
    - Comprehensive transactions-based data.
- B. Strengthening analysis on systemic risk — specific actions
  - Regulators should monitor financial risks closely with frequent, balanced policy discussion focused on systemic linkages:
    - Market and liquidity risk may become credit risk.
    - System-wide counterparty risk can trigger fire sales.
    - Reduced risk appetite and rush to safe assets cause contagion.
    - Corporate sector distress can transmit to the financial sector.
    - Declines in nonfinancial asset values increase banking sector credit risk.
  - Create task forces on specific topics (shadow banking, LGFPs, external investment/financing) with cross-agency representation.
  - Improve the Financial Stability Report (FSR):
    - Clarify focus and topics.
    - Collect more detailed information and apply deeper tools.
    - Use stress tests as early warning devices and employ network analysis to model system interconnections.
- C. Setting up institutional arrangements for better coordination — principles
  - Policy coordination needed because financial stability policy interacts with monetary, fiscal, structural, and other financial policies; macroprudential measures should not substitute for necessary macroeconomic adjustments.
  - Upgrade institutional framework to ensure each agency has internally consistent objectives and appropriate tools for their mandates.
  - Facilitate cooperation through suitable institutional models to enable information sharing, joint analysis, and coherent policy responses (stylized models for macroprudential policy are discussed in the source).

*Source: IMF working paper chapter titled "5. Stylized Models for Macroprudential Policy" (extracted content).*

### 1. Degree of institutiona

### _wp16181 - 1. Degree of institutiona

### Institutional arrangements matrix (summary)
- Degree of institutional integration of central bank and supervisory agencies:
  - Full (at a central bank)
  - Partial
  - Partial
  - Partial
  - No
  - No (Partial)
  - No
  - No

- Ownership of macroprudential policy mandate:
  - Central bank
  - Committee “related” to central bank
  - Independent committee
  - Central bank
  - Multiple agencies
  - Multiple agencies
  - Multiple agencies
  - Committee (multinational, regional)

- Role of MOF/treasury/government:
  - No
  - Passive
  - Active
  - No
  - Passive
  - Active
  - No
  - Passive (European Commission, Economic and Financial Committee)

- Separation of policy decisions and control over instruments:
  - No
  - In some areas
  - Yes
  - In some areas
  - No
  - No
  - No
  - Yes

- Existence of separate body coordinating across policies:
  - No
  - No
  - No
  - No
  - Yes
  - Yes
  - No
  - No

- Examples of specific model countries/regions:
  - Czech Republic
  - Ireland (new)
  - Singapore
  - Malaysia
  - Romania
  - Thailand
  - United Kingdom (new)
  - Brazil
  - France (new)
  - United States (new)
  - Belgium (new)
  - The Netherlands
  - Serbia
  - Australia
  - Canada, Chile, Hong Kong SAR, Korea, Lebanon, Mexico
  - Iceland, Peru, Switzerland
  - EU (ESRB)

### Recommendations for China — institutional design and legal changes
- Strengthen cooperation and information sharing across agencies to address systemic risk while respecting operational autonomy of separate agencies.
- Consider establishing a dedicated financial stability council that brings together all relevant agencies to address systemic risk.
- Establish a permanent Financial Stability Committee with a clear mandate to monitor systemic risk and make recommendations.
  - In the case of China, committee membership would include the PBC, the three supervisory agencies, and the MOF.
  - Each agency should be authorized to receive all materially important supervisory information from other agencies.
- Clarify responsibilities and obligations of respective regulatory agencies in new laws and regulations to require coordination to identify systemic risk by sharing information and strengthening policy coordination.
  - Revise laws, such as the Law of the People’s Bank of China, to involve relevant supervisory and regulatory agencies in the decision-making process (for example, by admitting these agencies to the macroprudential decision-making body).
  - This approach aims to reconcile differences in perspective, foster ownership of decisions made by a macroprudential committee, and increase compliance with the committee’s recommendations by ensuring that powers assigned to agencies can be used in pursuit of financial stability.

### Conclusions on China’s financial stability framework
- China’s financial system has rapidly morphed from an isolated, bank-dominated, and heavily regulated system into an increasingly large, diversified, and interconnected system.
- The transformation:
  - Improved the efficiency of the financial system.
  - Is expected to benefit economic development over the medium term.
  - Has brought new risks as financial institutions face competition pressures to expand into riskier assets and markets while the established regulatory framework has not kept pace.
- Key needs:
  - Closer policy coordination and better information sharing among agencies.
  - Cooperation and coordination of various agencies both in times of crisis and during “good times,” when risks may be germinating.
- Open question:
  - Whether coordination arrangements that are effective in times of crisis are equally well suited to normal operating conditions.

### Notable example (footnote)
- The US Financial Stability Oversight Council (FSOC) was established in 2010 right after the Subprime Crisis and brings together the Treasury, Federal Reserve Board, FDIC, SEC, OCC and other major regulatory authorities. The mandate of FSOC is to identify the risks to financial stability from both financial and non-financial organizations and respond to emerging threats to the stability of the US financial system.

*Source: Erland and others, 2011; excerpted content from the provided PDF chapter.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2016/_wp16181.pdf_