More than a year after the bankruptcy of Lehman Brothers and the ensuing financial market turbulence, we are at a critical crossroads. I think the post-crisis path will be bumpy, mainly because bail-out programmes have not been implemented in the right sequence. We can see the cart has been put before the horse: money has been pumped in continuously to cover the risks and ease the panic, but we are still far from cleaning up the balance sheets of western financial institutions.

When people talk about exit strategies without thinking about the huge amount of legacy assets on the balance sheets of the significant financial institutions, we know that the situation is dangerous.

China is lucky enough to have escaped the worldwide liquidity problem. Until we have a better alternative, we firmly believe that we can still use traditional ratios, limits and targets, together with stress-testing approaches, to successfully control risks. Those limits and ratios look simple, but they have proved effective in containing maturity mismatches and reducing large banks' heavy reliance on capital market funding.

I still believe strongly in maintaining an appropriate firewall between commercial banking institutions and capital market instruments. It is my understanding that only with proper firewalls between them can banks and capital markets function as two engines of growth. If one engine fails, the other can carry on. But when banking and capital market activities are too interconnected, then you are highly likely to face a crash. That is our fear. And that is the reality.

In my view, size is by no means the only characteristic of systemic importance. The complexity of banks' corporate structures and their inter- connectedness are among the key factors that determine the degree of systemic importance. Therefore, I consider the fundamental approach to addressing such institutions is still to cultivate a better corporate governance and risk-management culture, in particular to ensure that they do not engage excessively in the acquire-and-arbitrage business as casino banks.

When we deal with the systemically important institutions in China, we look first at the corporate governance and in-house risk management. The performance of the five largest banks has a significant bearing on the wellbeing of the banking industry and the wider financial system, not merely because they are large but also because of their inter-connectedness with other financial intermediaries. We launched full-fledged reforms of the Chinese banking sector in 2003 and our experience in making these institutions sound and safe shows that success depends crucially on making improvements in these areas.

Due to our efforts, China's banking sector has largely avoided the worst of the global financial turmoil. But although we have achieved progress, we should not be complacent.

For China, the biggest challenge is still the credit risk due to industrial structural change. Since economic reforms were initiated three decades ago, we have put a lot of emphasis on exports. Now we must balance the economy by boosting domestic consumption. But that is not easy. At the end of the day, it is the money tinkling in your pocket that leads you to the shops. So the way we increase income per capita is important.

So is willingness to consume. It is important that our government tries its best to lay down a solid welfare system and social safety net so as to make China's 1.3bn people at ease with spending their money.

In the course of this huge undertaking, we need consistency and persistence. The Chinese banking sector has to be very careful and cautious. We need thicker capital buffers and provisioning coverage ratios. Moreover, Chinese banks lack experience because of the short history of China's market economy, while some of their executives lack long-term commitment because of the ownership issue.

Every cloud has its silver lining. A positive feature of this crisis is that it sets the stage for further, more thorough reform. For this we need three things: a broad vision, a building-block approach and an awareness of sequence. Without the first, we may pass violets looking for roses. Without the second, we may pass prevention looking for cure. And without the third, we may miss the fact that the cart has been put before the horse while we are looking for a road map.

The writer is chairman of the China Banking Regulatory Commission