Restraint policies needed to differentiate commercial and development finance

CHEN Yuan

Chairman of the Board, China Development Bank

Abstract:

U.S. banks felt excess competitive pressure from both inside and outside because of financial liberalization, and liquidity brought about by a loose monetary policy intensified competition. To cope with the excess competition and pursue higher profits, commercial banks turned to innovative financial products with high yields but high risks. Investment banks, insurance companies and policy banks also deviated from their original business; as a result, risks in the financial system rapidly accumulated and a financial ecological imbalance occurred – the primary cause of the current financial crisis. Lessons from financial resources allocation in the U.S., Brazil and Japan show that since banks are special corporations with great social externalities, governments should institute financial restraint policies that clearly define the business boundaries between commercial finance and development finance to maintain financial system stability, magnify positive externalities and limit negative externalities.

Key words: financial resource allocation, financial ecosystem, excess competition, development finance

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