Guo Tianyong

Professor and director of the Research Center of the Chinese Banking Industry, Central University of Finance and Economics

 （注：本文发表于英国《卫报》，修改后的中文版将节后在国内发表。）

After the collapse of Lehman Brothers, takeover of Merrill Lynch, change of statue of Goldman Sach and Morgan Stanley to commercial banks, traditional investment bank does not exist anymore.

Why the powerful investment banks could not defend themselves? The main reason is the high risk – high return investment model they have adopted. In recent years, American investment banks has been buying, re-packaging and selling mortgage loans, the amount of which in many cases much more higher than the capitals they held. This "small horse pulling big cart" model accumulated risks, exposed the banks to the instability of the market to explosive effect.

Didn't investment bankers understand the risk behind that model? Of course they did. Financial tool invention is not a magic wand. It shifts risks around, not eliminate them. The clever and experienced investment bankers of Wall Street aren't blind to the risk in sub-prime loans. However, attracted to the high gains and personal incentives, they chose not to see the high risks.

The controversy surrounding the US government's 700 billion dollar rescue plan is therefore understandable. Although President Bush emphasized the effort is to save the economy from total collapse, but the fact that irresponsible "adventurers" are to be bailed out by the state after huge personal gains, does not go down well with the tax payers.

Opposite to Wall Street banks' reckless approaches, Chinese banks have been behaving extreme cautiously. Although the banks in China have undergone market reforms, but until now, the reform hasn't been thoroughly enough. The banks' investment decisions and administration are heavily influenced by government intervention. The bankers think themselves more like bureaucrats than business people. Whether a bank they run makes 10 billions or 100 billions is less important than to keep their position. Making a big profit won't give them direct financial incentives, but the loss of their rank inside the bureaucratic system means the loss of their status and the possible gray income along with that. Therefore they are often overcautious while running the banking business. No result is better than bad result.

Another reason that China's banks have avoided big loss is China's banking system hasn't really integrated into the international monetary system yet. This in some way shelters it from the global turbulence. Had China's banks been allowed to operate at the global stage unrestrainedly, I'm sure they would incur substantial more loss than they do now.

Although it has avoided big hit during the current crisis, I don't think China's banking system should stay where it is now. The mentality of over-emphasizing safety may avoid some risks, but the price to pay is low efficiency. China should not shy away from pushing the market reform, encourage invention, and improving incentive and deterrent in the banking system. China's banks are in the process of entering more global transactions. The key is to keep this process under proper risk control and management.