Economists warn of more troublesome spillovers of Western bank crisis despite acquisitions of failed banks
China has 'a larger role to play' to prevent financial risks from expanding
Published: Mar 28, 2023 07:44 PM
A Silicon Valley Bank branch is seen in Massachusetts, US, on March 11, 2023. Photo: VCG

A Silicon Valley Bank branch is seen in Massachusetts, US, on March 11, 2023. Photo: VCG

The acquisitions of the failed Silicon Valley Bank (SVB) and Credit Suisse have temporarily eased fears of an imminent crisis in the West. However, economists worry that the turmoil could cause more potentially troublesome spillovers into the rest of the world, urging policymakers in the US and the EU to find out how the bank crisis started so as to avoid a repeat of 2008 financial crisis.

They said China will become a "locomotive" of the world economy in 2023 amid a potential economic recession in developed economies led by the US, adding that China has a larger role to play in global institutions to help prevent the banking crisis from expanding.

US regional bank First Citizens BancShares Inc announced on Monday that its subsidiary First-Citizens Bank & Trust Company entered an agreement with the Federal Deposit Insurance Corp (FDIC) to buy all loans and assume all customer deposits from the failed SVB.

This is the second acquisition of a failed bank following UBS' recent takeover of beleaguered Credit Suisse in Switzerland. However, the prospect of a deepening banking crisis in developed economies remains insufficiently defused amid continuous interest rate hikes, according to economists.

"For now, the priority must be discovering how we arrived at the current predicament," Hilton L. Root, an expert on international political economy and development, and professor at the George Mason University School of Public Policy, told the Global Times.

The big lesson is that those areas of the financial sector that enjoy the least scrutiny typically end up with the biggest problems. The consequences for the technology sector's rate increases were not being examined from a more global perspective, Root said.

"All central banks should cooperate actively to prevent a global financial crisis such as in 2008," Jeffrey D. Sachs, a professor at Columbia University and a renowned economist, told the Global Times.

He said the tightening of monetary policy in the US and the eurozone may lead to credit crises in other countries in the coming months.

Despite the turmoil in the banking sector, the US Federal Reserve raised the benchmark interest rate by 0.25 percentage points on March 22 - the ninth consecutive rise in borrowing costs within a span of 12 months. It hinted that there could be one more interest rate increase this year.

Bank shares on Wall Street plummeted more than 20 percent over the last month, indicating deep worries of a full-blown banking crisis in the US.

According to a new study, about 186 banks in the US could collapse if half of their depositors were to withdraw their funds quickly.

On March 23, China's Foreign Ministry urged the US to explain to the world how serious the risk of the US banking crisis is, and how US authorities plan to deal with it and minimize its spillover effects, as the SVB failure has triggered global financial market volatility.

Major growth engine

Amid the unfolding bank crisis and a potential economic recession in developed economies including the US and the EU in 2023, many are pinning their hopes on China for global economic recovery.

Currently, Western central banks are faced with the difficulty of finding a balance between controlling inflation and maintaining financial stability, and Western developed economies led by the US may fall into stagflation in 2023, Kang Yong, chief economist with KPMG China, told the Global Times.

If economic recession pressure grows in the US and Europe, investors would reassess bank-related assets, which will increase pressure on their financial systems and accordingly increase economic risks, according to Kang.

"The US and Europe are likely to have a downturn in 2023, while China will continue its growth. In this regard, China will be an engine of growth for the world economy," Sachs said. He said China should also participate actively in global institutions to help avoid a financial crisis in poorer countries as well as to help prevent the banking crisis from expanding.

China has set its annual GDP growth target at around 5 percent for 2023, as the country embarked on a rapid economic recovery after a decisive victory against COVID-19.

The bank crisis in the US and the EU has little impact on China's financial markets as the country's monetary policies are relatively independent. Industry regulation is stricter and the banking sector quality is more stable, according to Kang.

In a volatile international environment, Kang said that China should step up efforts to expand domestic demand, while focusing on science and technological innovation to make breakthroughs in cutting-edge and key technologies so as to achieve industrial chain self-reliance.

The most important step to ease the global economic crisis is to end the Russia-Ukraine conflict through a negotiated settlement, and China's peace initiative is a superb contribution toward this goal, Sachs said, referring to China's 12-point proposal to end the conflict in Ukraine.