if some people do bad things, their reputation will be hit hard. therefore, they can be trusted since the cost will be too high for them to serve the devil. what does the financial market trust? it trusts money. it trusts capital fund. why should the owners assume the risk? when you do not know about or cannot distinguish the credit of a person, you can look at how many bets he has made, or how much money chipped in. if he has put his money here or used his house as collateral, you can trust him within the scope of his collateral or the money he has chipped in. in this way, you are able to assume the corresponding risk against his collateral. this is the essence of finance. it is about why i can trust you. i trust you, or your record, or your capital fund. so owners need to assume the risks. when you start up a business, let ’ s say, how do you distinguish illegal fund - raising from normal and standardized financing? the precondition is risk - assumption by the owners. assuming that an enterprise comes to control a rural credit cooperative ( rcc ) or a rural commercial bank, and becomes its owner. if anything goes wrong in this rural commercial bank, it should be the owner ’ s capital fund that bears the brunt. why do we focus on the car? the core of basel accords is the car. the requirement for it is 8 %. if a bank does many other types of business, the car requirement will be higher. this is also the case if it is a systemically important financial institution ( sifi ). why is the car highlighted? the logic is that the money is really yours, and your money will be lost first if there is any loss made, so i can trust you to a certain degree. i believe that the money that is lost first is your money, and usually you would not easily lose your own money, so i can trust you. this is also true in our supervision on banks. when we find any rcc or financial institution is at risk, we should remind it of the situation. if it begins to consume its own capital, we should pay attention to it. if its capital fund is almost used up, the money lost later will be that of the depositors. now we should pay close attention to it. when the loss made reaches a certain degree, we should take it over rather than allowing it to keep operating. why?

for bank regulatory rules to rein in the excessive credit expansion of the commercial banks. the result was that bank rules were not fully implemented and capital ratio was notably inadequate. in fact, the basel accord is a comprehensive regulatory and internal assessment system. its essential indicator, capital adequacy ratio embraces earning objective while effectively containing the excessive expansion of the bank. the numerator of car indicates the capital adequacy of the bank and robustness of the buffer against shocks. the more capital, the more resilient a bank is against risks. meanwhile, dynamics of capital depends on retained profit. when a bank calls for additional capital, the investors look at the earnings of the bank. an unprofitable bank can hardly attract external finance. in addition, expansion through merger and acquisition is also subject to capital constraint. the denominator of car assigns different risk weights to assets so as to drive banks towards less risky business and away from high risk business. risky business must be supported by more capital. this effectively contains the excessive growth of risky assets. the basel ii initiated the so - called “ internal rating base ” ( irb ), encouraging banks to identify asset risks through internal rating system. the risk weighting system encourages non - asset business, or commission - based business. the accord will also boost asset securitization since securitization lowers risk level of assets thus lowers capital requirements. in a way, it encourages banks to shift, sterilize and lower risks by all means. in this sense, such an indicator is a combination of incentive and control mechanisms, while encouraging technical innovations to improve credit asset quality. nevertheless, a principal problem in applying car to chinese banking institutions is that different banks bear different historical legacy, which is difficult to measure by a unified standard. this historical problem should be solved by more aggressive reforms before more stringent regulations could be applied and serve as the core objective to improve their corporate governance and business operation. in this spirit, in 2003, the china banking regulatory commission initiated the 3 - year plan for banks to comply with basel ii. some technical issues deserve attention, which, if not properly dealt with, may dampen the effectiveness of the policy. for instance, for banks with inadequate capital, the so - called “ shadow calculation ” may leave a lot of leeway. for banks with lower than 4 percent of capital adequacy ratio, strict regulatory measures have been taken. however, for banks with capital ratio sliding down