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What Can China Learn from Overseas Investment Bank Regulation Systems

A comparison of investment bank regulation systems of such countries as the United States and the United Kingdom reveals important areas in which China can find improvement. For a better investment bank regulation system in China, and to ensure a stable and healthy development of the securities market, the following areas should be emphasized:

- The principles of legality, coordination, efficiency, and transparency should be respected without compromising fairness. The primary goal of investment banking regulation in China should be to protect the interests of investors, ensure fair competition, and reduce systematic risks in the banking sector. Investment banking regulation in China should also stick to the principles of legality, coordination, efficiency, and transparency. The legality principle in the regulation of the investment banking industry means that any regulation in breach of law carries no legal effect. The coordination principle in the regulation of the investment banking industry emphasizes that different departments of the same regulatory body and different levels of the institutional hierarchy should have their respective, but coordinated, responsibilities. The jurisdictions of different regulatory bodies should be clearly defined, and coordination should be strengthened in enforcing the laws. The efficiency principle in the regulation of the investment banking industry requires the establishment of an effective regulatory mechanism that can minimize the cost and maximize the benefit of regulation. At the same time, the overall efficiency of the investment banking system should be improved through regulation, standardized competition, and monopoly prevention. The transparency principle in the regulation of the investment banking industry means that as the regulatory body, the regulatory departments of the government should solicit the opinions of investment banks and other market participants before promulgating or changing major regulatory policies or rules. This will overcome the information asymmetry between the regulator and the regulated, increase their willingness to cooperate with the regulator, and improve regulation efficiency.

- Centralized legislation based regulation should be primary and self-regulation supplementary. Internationally, there is not an absolutely fixed and immutable model for the regulation of the investment banking industry. Recent years have seen international securities integration and increased communication and exchange between the securities regulatory agencies, investment bank (or securities trader) associations, and securities exchanges of different countries. This has drawn the centralized regulation model and the self-regulation model toward merging with each other. Therefore, in the regulation of the investment banking industry in China, centralized legislation-based regulation should play the leading role, supplemented by self-regulation. The contents of regulation should be comprehensive and multidimensional.

- Risk supervision should be strengthened. Every business line of an investment bank, whether traditional business or innovative business, develops with risks. With the fast development of the global economy and financial market, investment banks keep creating financial instruments with greater risks. Uncertainties in macroeconomy, political policies, and micro-operation environments are also increasing. As a result, investment banks are facing unprecedented risks. Therefore, risk supervision has taken center stage in the regulation of investment banks. Chinese investment banks should draw on the experience of advanced markets in consideration of their own development characteristics and constantly improve their ability to detect and control risks through new technologies and methods. At the same time, an investment bank insurance system needs to be established as soon as possible to better prevent risks in the regulation of the Chinese investment banking industry.

- Information disclosure should be strengthened. Complete information disclosure and substantial examination are also known as the report system and the approval system, respectively. Each of these two systems has its own advantages and disadvantages. The investment bank regulation system of China should raise the requirements regarding mandatory disclosure of information. In particular, when an investment bank is preparing for equity financing, public offering, or other activities of innovation and development, strengthening information disclosure of the investment should be the top priority. This is conducive to the healthy development of the Chinese investment banking industry, the formation of its competitive strength, and the improvement of the information disclosure system in the Chinese capital market, leading to the healthy development of the Chinese capital market.

- Importance should be attached to being prospective. The regulation of Chinese investment banks should be prospective to some degree, giving full consideration to the impact of new technologies and financial globalization on securities regulation. It should also take into account the trend toward mixed operation to lay a foundation for the Chinese financial industry and transition into a mixed operation system.

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