Letting banks fail

Stratfor:

China has taken another step in shifting its economy. Zhou Xiaochuan, chairman of the People’s Bank of China, announced March 31 that starting May 1, the Chinese government would insure individual deposits of up to 500,000 yuan (about $81,000) at Chinese banks. By providing an explicit guarantee on ordinary bank deposits, the insurance scheme will pave the way for Beijing to liberalize deposit interest rates, allowing banks to compete more fiercely to attract new depositors.

At the same time, it will enable China’s government, at least in theory, to step back from its longstanding but implicit promise not to let individual banks fail, injecting risk into the system. This deposit insurance is a key step toward curbing the moral hazard and widespread capital misallocation that characterize China’s economy, something that has long eluded Chinese decision-makers focused on maintaining high levels of economic growth. It would have the added advantage of boosting consumer confidence and spending.

Soon we’ll probably see some bank failures. It makes sense, given the lending practices since 2008/9.

Leave a Reply