The recent financial crisis has exposed critical vulnerabilities in the modern financial system. However, the current reforms proposed by the Financial Stability Bureau and global standard setters, such as the Basel Committee on Banking Supervision, are certainly a step toward building a more resilient global financial system.

Chinese regulators welcome the new capital and liquidity standards approved by the G20 in November (the so-called BASEL III rules), and China's banking regulator, the China Banking Regulatory Commission (CBRC), has already begun the process of revising its own regulations so that BASEL III can be implemented by beginning of 2012.

The recent crisis occurred because the global financial system had become over-leveraged, over-complex, and under-regulated in key areas. These characteristics contributed to the fragility of the system and eventually led to the crisis. To prevent a future crisis, we need a simpler financial system that is less leveraged, and better regulated. That transformation, which the current reforms are leading to, will have costs. Some vested interests will be hurt, and there will be costs and uncertainties in the adjustment process. However, trade-offs are necessary to avoid the disastrous consequences of unmanaged fragility.

I wish to make three points about regulatory reform in the financial sector.

First, the importance of international collaboration and cooperation in financial regulation and supervision. One of the fundamental problems with the modern financial system is the fact that capital flows have become increasingly globalized, while financial regulation prior to the crisis remained largely a domestic concern. Indeed, effective financial regulation today requires intense collaboration amongst national regulators not just in setting standards but also in daily supervision.

We have seen important improvements in this area in recent years. The membership of important international organizations, such as the Basel Committee, has been expanded to include authorities from emerging markets, which are playing an increasingly important role in the global financial system. Supervisory colleges have been formed amongst national regulators in order to effectively supervise global financial institutions. Indeed, the CBRC has hosted a number of college meetings for two of the largest Chinese banks. And important work is under way to establish and harmonize global systemically important financial institutions, the so-called G-SIFIs.

That said, there remain a number of difficulties for international collaboration, including the fact that countries have different legal systems, some are at different stages of development, and many have different financial structures. These differences make it very difficult to have one-size-fits-all rules for all occasions. For example, emerging markets typically have less developed capital markets that may not be suitable for innovative capital instruments. Even developed countries do not have uniform financial structures.