China central bank warns SVB collapse shows hazard of rapid rate hikes

The collapse of Silicon Valley Bank shows that rapid monetary policy shifts in developed economies are having hazardous effects on financial stability, an official with China’s central bank said Saturday, in its first official comment on the crisis.

Some institutions grew too used to buying assets in a low interest-rate environment and lacked the foresight to position for tightening cycles, Xuan Changneng, a deputy governor at the People’s Bank of China, said at the Global Asset Management Forum in Beijing. SVB’s balance sheet made it more vulnerable to such hikes and led to its failure, he said.

Rapid interest-rate increases to contain inflation have brought new risks to the global economy, according to Xuan. With the inflation outlook in developed economies still uncertain and growing risk to financial stability from elevated rates, central banks now face a “dilemma” when making their monetary policy decisions, he said.

The abrupt collapse of SVB this month roiled global financial markets and put authorities around the world on alert for signs of contagion. The US lender’s China joint venture also sought to calm local clients by saying its operations were independent and stable.

The cases of SVB and other regional US lenders that failed are “more one of a kind” and will unlikely have a systemic impact on the US economy, said Howard Marks, co-founder of Oaktree Capital Group, citing the lenders’ concentration of asset classes, depositors and regions. “I don’t see any analogy” to the subprime collapse that led to the global financial crisis, he told the same forum.

Still, funding strains in the aftermath of Silicon Valley Bank’s failure have escalated. US banks borrowed a record $152.9 billion from the Federal Reserve’s discount window — the traditional liquidity backstop for banks — in the most recent week. That was up from $4.58 billion the previous week and compares to the prior all-time high of $111 billion reached during the 2008 crisis.

On Guard

All countries should be on guard for financial risks that could gradually emerge, as high interest rates will likely persist, China’s vice finance minister Xia Xiande told the forum. The ministry will step up its implementation of a proactive fiscal policy this year, including supporting “reasonable” financing needs of local governments, to ensure China’s growth target of around 5 percent is achieved, he said.

The nation’s financial system has been operating stably with risks “controllable,” the central bank said March 15. The monetary authority also vowed to reduce the number of existing high-risk financial institutions and prevent any systemic risks.

China is overhauling the regulatory regime for its $60 trillion financial system to better curb risks. An enlarged national regulator will be set up by absorbing the current banking and insurance watchdog and taking over some duties from the central bank.