Lessons from the crisis: Will China open the broking floodgates to banks?
Mainland regulators would do well to study US financial history to learn from past mistakes before letting lenders diversify into broking
The hope is that the global financial crisis spooked China out of cooking up its own opaque congee of derivatives, bond insurance and colossal banks.
The fear, though, is that mainland regulators walked away with too few lessons from the crisis and that the world's second-largest economy may deregulate itself into a similar fiasco.
"There's definitely a preference to move from a bank-based financial system to more of a capital markets-based system," said Xiao Geng, vice-president of research at the Global Fung Institute in Hong Kong. That would mean more of the banking sectors' more than 120 trillion yuan (HK$151 trillion) flowing into the securities arena, "but it's unclear right now how that will actually happen".
For some hints on how - and how not - to do that, regulators will have to look back well before 2009, when lender-cum-brokers were falling like dominoes on Wall Street.
In 1933, the US congress forced banks to either lend or invest, but not both. The Glass-Steagall Act passed that year kept lenders out of the insurance and securities businesses and vice-versa for investment banks. Regulators went a step further in the mid-1950s by pulling bank holding companies out of investment banking. It's easy to forget that some of the major financial reforms bearing down on Chinese regulators today are recent memories for Americans.
Just 30 years ago, a wave of financial innovation was applying pressure to US regulators to ditch "Regulation Q", which had kept deposit rates under 5.75 per cent at most banks since the 1930s. This is the inflection point China teeters on today, with many economists predicting that mainland regulators will get rid of their own deposit cap within two years. Much like the US several decades ago, Chinese banks are desperate to compete with innovators such as P2P lenders and online money market funds, which have started to eat into their deposits.
Given the chance, many Chinese lenders would no doubt jump at the opportunity to diversify into broking and underwriting.