The global wave of bank failures in the Great Depression was triggered by the seeminly unimportant collapse, in May 1931, of a bank in Vienna, Creditanstalt, which was tiny in relation to the size of the global banking system.[a][b][c]
Similarly, in 2008, global credit markets froze after the failure of one investment bank, Lehman Brothers.[d]
A single bank failure can have enormous consequences, given the interconnected nature of banking systems. If one bank is unable to pay money owed to other banks, those banks might be unable to pay money owed to yet other banks.
According to the article, "banks in China are facing a pinch of liquidity," i.e., they're telling other banks to whom they owe money that they can't pay right now, but this is only a temporary "pinch."
Unrelated, but you seem to know a lot about this, and I've been trying to track down an answer for months, so I'll ask.
I notice that China's M2 is $27.52T -- which is roughly equal to the US and the EU combined (ditto for M3). Considering China's real economy is roughly a quarter of the size of the US and EU combined, how can it sustain such a high M2?
I ask on the tangent that it seems like China has ridiculous amounts of cash to GDP, so it seems like defaults should be extraordinarily rare.
Thanks! This was very interesting to me given it was a topic I knew nothing about (nor did I even know China was a two currency system).
I found this article on Medium (written by a fintech firm) that explains how it works with slightly more detail and specificity, if anyone is interested:
I don't fully understand how China works as a country and economy:
* It is not a democracy.
* Citizens lack certain social freedoms that people in other developed countries take for granted.
* Properly speaking, it is not a capitalist system, as there is a lot of investment, including by state-owned enterprises, that seems uneconomic (extreme example: ghost cities).
* According to numerous media reports, its financial system has been plagued by bad loans for many years, so far without consequence (a quick Google search for "China bad loans" can verify it).
* Its national accounting figures (e.g., GDP) are reportedly "managed" (or less charitably, cooked) and therefore cannot be taken at face value.
* Its money supply, e.g., as measured by M2, appears to be much greater than levels that would be considered ludicrous in other developed economies.
It remains to be seen whether this latest "pinch" of liquidity in the banking system is the proverbial canary in the coal mine.
> I don't fully understand how China works as a country and economy
I don't think that anybody, or even the head of Chinese central bank himself knows how Chinese economy works, except for the fact that it does.
When I lived in Canada, I shared apartment with a power couple from Beijing: a central bank worker, and a former Huawei senior engineer (though both were from Shaanxi originally.) A girl who worked in the central bank for her entire career were telling that just understanding everyday workings of the system was beyond PBOCs most senior analysts, giving the example of how PBOC took years to trace missing billions of rural lending cooperatives that went bust mid nineties, or how the entire PBOC analysis and statistics wing was unable to calculate country's real current account changes with any level of certainty.
While Enrons happen, a fundamental aspect of Western-style accounting is legally-mandated transparency (at least to someone, somewhere).
Without a standards-based legal system, what's to stop anyone from cooking the books?
And if every ledger is a lie to some degree, then aggregating those just produces bigger lies. Until you're finally left with the "unable to calculate [...] with any level of certainty" answers to a host of important economic questions.
There is also some crazy stuff going on that the citizenry engages in. The ghost cities are mainly caused by a custom of families with a daughter requiring suitors to own two and three homes before being eligible to court. Most of these extra apartments owned by single men are not even furnished or finished. [1]
> * Properly speaking, it is not a capitalist system, as there is a lot of investment, including by state-owned enterprises, that seems uneconomic (extreme example: ghost cities).
The definition of capitalism doesn't require that the capitalists are competent.
Why is this being treated as news as of now? Note the article chose to not mention a timeline or give any background at all. This bank was taken over on May 24 this year, with a very public announcement. Its purported major investor was arrested in 2017. The bank has not published an annual report since then. For details see: https://zh.wikipedia.org/wiki/%E5%8C%85%E5%95%86%E9%93%B6%E8...
> Banks in China are facing a pinch on liquidity following the government takeover of a commercial bank that is resetting the rules for trading in the country’s interbank market.
TFA and other news aren't reporting the takeover. There's some recent additional reports coming out now of the effects the takeover had on liquidity in the interbank markets.
This was the first default in the interbank market so it broke the implicit credit guarantee in the interbank market. So this is a reform that is long overdue but they have to start from somewhere.
In China, there seem to be no moral boundary in between just any legit banking business, and the most crazy high finance tricks being done with creditors money.
Moreover, I think most of local bankers think that's just the way it should be, thinking "boring Western style banking is just not for the high flyers like us"
Few things to tame out of this:
1. In China, a model bank can fail overnight
2. Central bank totally missed a sum on order of tenths of billions in cash being moved under it nose
3. All "good on paper banks" (which means all of them, given that is China) are under doubt now
4. Nobody knows how to tell of real risk indicators as Chinese banker got ungodly good with hiding elephants in their balance sheets
5. The alleged "private project" of a banker that has failed was a "risk free" real estate project.
6. Big banks will grow even more wary of lending to small banks with no diversity in leadership. In a big bank, you can at least be sure if 1 GM out of thousands does this, at least 1 another GM out of those thousands will try to impede him, but that's not the case with "1 man banks" which nearly all non big four banks are (which themselves evolved out of failed ITICs that were ran by party cadres https://zh.m.wikipedia.org/wiki/广东国际信托投资公司)
> In China, there seem to be no moral boundary in between just any legit banking business, and the most crazy high finance tricks being done with creditors money.
How is this a "chinese" problem? The recent sub-prime loan bullshit took place in the US and almost sank the global economy.
The bond pricing fixing took place in the UK and cost investors billions.
This is endemic to banking globally. The only thing that seemed to help was Glass–Steagall in the US which of course, banks got repealed because it worked too well.
Lehman was a model bank up until September 2008, at least as seen from the outside. The same goes for RBS (even though their acquisition of some of ABN Amro had already encountered some strong head-winds), UBS, Credit Suisse or Deutsche until very recently.
Cant speak for the others, but RBS wasn't a 'model' bank. RBS and Barclays were well known as the risker banks. I don't recall any concerns raised about Northern Rock, or the other ex building societies though. Maybe that's the interesting parallel here, the midsize banks aren't watched as closely and manage to drag down the too big to fail banks.
Maybe it had greater assets under management, that doesn’t translate to power or direct ownership. They are custodians and facilitators. Their worth is traded on NYSE and doesn’t exceed top internet companies, who imo have more power.
90 billion is not systemic though. It would hurt the profits of some of the other companies, sure, but it's not anywhere near threatening the entire system.
Banks borrow short and lend long, which is why they are inherently unstable, requiring either implicit/explicit government guarantees, or be subject to "runs" on deposits.
In the unlikely environment of no demand for loans, banks would have no incentive to take deposits (ie borrow short), so instead would probably charge fees for reducing the risk of holding large amounts of cash for their account holders.
Such a storage facility would not have the profit margins of taking on the risk of lending, I'd guess that the net effect of a "fully saturated and content" economy would be "churn" as money was moved from account to account. Given that there would be no growth in such an economy, there would also be no wealth creation. So over time, the value of the money would deflate.
If the Gini coefficient went to zero (ie equal wealth distribution), the need for money would effectively disappear. So would banks.
> Given that there would be no growth in such an economy, there would also be no wealth creation.
No, because people still need to eat, consume electricity, consume entertainment, etc. So wealth is still created. If it's a no-growth economy, that wealth is consumed at the same rate it's created.
> So over time, the value of the money would deflate.
No, it would be constant (assuming no money creation by the central bank).
> If the Gini coefficient went to zero (ie equal wealth distribution), the need for money would effectively disappear.
No, you need money as a means of exchange and a store of wealth, just like now.
I am not sure why you are being downvoted, money is just a medium for exchange of goods and services (ie. human time/work value) even if there was universal basic income you would still need a unit of measure to prevent a bad actor from taking all the resources.
It's hard to imagine an economy where there is no loans. If an economy is fully saturated and doesn't desire more loans, then that still leaves trillions worth of existing loans (and ongoing refinancing) that need to be served; if the amount of loans isn't growing then the banks won't grow but they can profitably operate with a stable amount of loans.
The interest rate fails, even below zero and the banks start charging fees for all sort of things. Like it is happening right now in Europe and other parts of the modern world.
I'd be willing to pay a fee to the bank to hold my money for me. That's a useful service. Or they could take some fee off a debit card every time it's used. I can't imagine many people would rather keep all their money at home rather than pay a bank to hold it for them.
This is a very important and socially desirable function that banks fulfil.
>I'd be willing to pay a fee to the bank to hold my money for me.
You are effectively doing this already (twice). Perhaps your bank charges you a yearly fee for the account in the likes of $10/year, but you're also "paying" by not investing the money yourself, of course, the bank has many lending opportunities that you have not so you might not be capable of doing so. But the point still stands.
They can't possibly do that with a bank account though? In the sense that a collapse would see you get cents in the dollar back, hopefully the taxpayer pays the rest if you are lucky.
You can pay them for a safe deposit box and they can properly _hold_ your money if you want, but that money won't be worth much in 30 years.
Unless I'm wrong and some banks provide a fully backed savings account? Doubt it would be worth the effort for them.
>You can pay them for a safe deposit box and they can properly _hold_ your money if you want
Depends on what your threat model is. A safe deposit box is safe from bank collapses/bail ins, but not against theft.
>but that money won't be worth much in 30 years.
In that case you'd probably be stashing gold rather than bills.
>Unless I'm wrong and some banks provide a fully backed savings account? Doubt it would be worth the effort for them.
because right now there's no demand for it. if there was a period of zero/negative interest combined with low confidence in banks, I'm sure that non-fractional reserve banks would pop up. Either that or people stash their money overseas.
Banks fail sometimes and there is no regulation or risk management system that can prevent it.
To increase protection for clients and economy one could by law introduce 'bank types' where, for example the type 'low risk' is only allowed to do transactions with low risk with of course lots of options to define what 'low risk' is.
Gotta be careful with that. Someone might get the bright idea to combine a bunch of smaller medium risk transactions to diversify and reduce risk. Then you end up with 2008 all over again
While banks sometimes fail this is the tip of the iceberg. The government has been using the banks to keep the economy on high, never mind that an awful lot of the loan security is not worth it's paper value.
A single bank failure can have enormous consequences, given the interconnected nature of banking systems. If one bank is unable to pay money owed to other banks, those banks might be unable to pay money owed to yet other banks.
According to the article, "banks in China are facing a pinch of liquidity," i.e., they're telling other banks to whom they owe money that they can't pay right now, but this is only a temporary "pinch."
[a] https://www.bis.org/publ/work333.pdf
[b] https://www.jstor.org/stable/3133667
[c] http://eprints.lse.ac.uk/87151/1/wp274.pdf
[d] https://en.wikipedia.org/wiki/Bankruptcy_of_Lehman_Brothers#...