In Short:
Starting in the mid-1980s, America’s banks faced the Savings and Loan crisis due to poor risk controls and property downturn. Similarly, Chinese small banks are collapsing due to bad loans. China is addressing this issue by merging smaller banks with bigger ones. The country struggles to clean up mismanaged rural banks without causing social instability. Regulators aim to consolidate banks amidst delays in enacting laws for bank failure.
China’s Small Banks Facing Crisis
Remember the Savings and Loan (S&L) crisis that rocked American banks in the mid-1980s? Well, it seems like China’s smallest banks are dealing with a similar situation now. These banks are facing issues like aggressive lending growth, poor risk controls, and exposure to a property downturn.
Vanishing Act
Things are starting to change in China. In a single week ending June 24th, **40 Chinese banks** disappeared as they were absorbed into bigger ones. This rate of disappearance is unprecedented, even compared to the S&L crisis.
Complex Challenges
China’s regulators have been trying to tackle these issues for years. The collapse of several mid-tier banks and state financiers, along with the meltdown of powerful investment managers, has put the spotlight on the small, rural banks. These banks, totaling **3,800 institutions** with 55 trillion yuan ($7.5 trillion) in assets, have been mismanaged and burdened with bad loans.
Delicate Cleanup
Cleaning up this mess is no easy task. Many of these small banks were established to support small businesses, particularly in China’s poorest areas. But the toxic debts they hold make it difficult for them to provide new loans to these businesses, impacting local economic growth.
Regulatory Intervention
One way to address the crisis has been through recapitalization. Local governments are issuing special-purpose bonds to bail out banks. While this has helped some troubled provinces, the challenges persist.
Future Prospects
Regulators are focusing on consolidation to make oversight easier. Critics argue that merging bad banks only creates bigger, riskier ones. China lacks a mechanism to allow banks to fail, unlike the US during the S&L crisis.
With economic growth slowing down, policymakers in China will need to find effective solutions to the deep-rooted problems in the banking system.
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From The Economist, published under licence. The original content can be found on www.economist.com
