China’s smaller banks vulnerable to shocks as policy makers tighten rules
Liquidity risks are now a reality for China’s smaller lenders and could even lead to bank runs or bankruptcies, say analysts
Smaller Chinese banks have made risky investments using volatile wholesale funding streams.
Now, as policy makers tighten liquidity and strengthen the rules governing banks’ involvement in shadow banking, analysts warn that the chance of a liquidity shock is increasing.
It was a liquidity shock that struck foreign institutions like Lehman Brothers and Fannie Mae in the US, and RBS group in the UK in 2008, when they found themselves without the cash available to meet their obligations.
Chinese policy makers, therefore, have a new tightrope to walk as they look to curb financial risks in the system without sparking a run on a smaller bank, or worse.
Life is not always easy for smaller Chinese lenders.
Larger banks can employ economies of scale to achieve cost savings that they cannot. Rules governing cross-regional business mean that Chinese regional banks are restricted to offering services in their own locations and, by and large, Chinese savers prefer to entrust their cash to the larger players, not least because the big banks have been in existence for longer.