Stephen Roach

Opinion | China is quietly revelling in the US’ latest financial crisis

The string of bank collapses in the US due to a lack of Fed supervision feeds directly into Beijing’s narrative that American power is in irreversible decline

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Chinese President Xi Jinping pictured at the Kremlin in Moscow ahead of China-Russia talks on March 21. Photo: Sputnik via Reuters

Stephen Roach

Published: 4:30pm, 26 Mar 2023

No two crises are alike. That is true of recent financial upheavals – the Asian financial crisis of the late 1990s, the dot-com crisis of 2000, and the global financial crisis of 2008-09. It is also the case with crises sparked by geostrategic shocks, such as wars, pestilence, famine, and pandemics.

Today, we are witnessing a potentially lethal interplay between these two sources of upheaval: a financial crisis, reflected in the failure of Silicon Valley Bank, and a geostrategic crisis, reflected in the deepening cold war between the United States and China. While the origins of each crisis are different, the outcome of their interaction is likely to be greater than the sum of the parts.

The failure of SVB is symptomatic of a far bigger problem: a US financial system that is woefully unprepared for the return of inflation and the concomitant normalisation of monetary policy. SVB risk managers were in deep denial about such an outcome, and the bank was brought down by sharp losses on its unhedged US$124 billion bond portfolio, triggering a classic bank run by fearful depositors.

Depositors can hardly be blamed for not doing the due diligence on complex financial institutions they entrust with their assets. That task falls to the Federal Reserve, which, sadly, blew it again.

Starting with reckless monetary accommodation that perpetuated a dangerous string of asset bubbles – from housing to credit – and continuing with the misdiagnosis of post-Covid inflation as “transitory”, the Fed has now made a supervisory error of monumental proportions: it fixated on large banks and overlooked smaller regional banks like SVB, Signature, and First Republic, where accidents were waiting to happen.

This is particularly disheartening in the aftermath of the post-2008 implementation of a new supervisory regime. “What if” stress tests for banks quickly became the gold standard for minimising the risk of financial contagion.