Explaining Why The US is Regulating JPMorgan But Not SVB

A healthy financial system now has a blind hole thanks to Washington. If it wants to reform, it needs to look to China.

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Little banks appear to be having problems. The rushed fundraising by SVB Financial Group caused US bank stocks to plummet. While major institutions like JP Morgan Chase & Co. tried to persuade some SVB customers to shift their cash Thursday by highlighting the safety of their holdings, prominent venture capitalists urged their tech businesses to remove money from Silicon Valley Bank. Traders are now making predictions about which lender will fall victim next.

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American regulators, including the Federal Reserve, have adopted contrasting approaches to banks since the global financial crisis. On the one hand, they publicly discussed wanting to spend less time monitoring the balance sheets of smaller institutions, giving them more opportunity to experiment with fintech. On the other hand, they have tightening the noose on the giant banks they considered to be "systemically vital". Examples are JPMorgan and Bank of America Corp.

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The US had nearly 2,000 banks with $19.8 trillion in household savings at year-end 2022, according to the Fed. Over $10.5 trillion, or 53% of the total, was owned by the top ten. The sixteenth-largest bank, SVB, with roughly $195 billion, is not included in that VIP list. 

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On Request

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Demand deposits for SVB rose along with the tech boom and decreased as struggling firms.

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It is incorrect to treat tiny banks with such little oversight. In a financial system that is generally fundamentally robust, American authorities have produced a blind spot.

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Washington may benefit from taking a cue from Beijing, its main geopolitical foe, in this regard. China is one of the most indebted countries in the world, with its debt-to-GDP ratio hovering above 300% and continuous worries over excessive municipal borrowing and real estate borrowing.

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China's financial system has survived up to this point in spite of the massive debt burden. A crisis that some outsiders had been forecasting for at least ten years has been averted by local regulators.

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This is due in part to Beijing bureaucrats realizing that the smaller banks have the highest failure rate. The likelihood of a bank run and a systemic collapse dramatically decreases once they control these lenders. They are more brittle since it costs them more to get money and their depositors are pickier in tumultuous times.

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This knowledge was partly attained through difficult experience. Over 4,000 minor financial institutions exist in China. While making up only approximately 15% of all banking assets, they can be risky. A liquidity freeze and an increase in interbank borrowing costs were the results of difficulty at the Inner Mongolia-based lender in 2019, forcing the government to seize control of Baoshang Bank Co. This was the first such seizure in 20 years. After being unable to access their funds at village lenders, hundreds of individuals in the province of Henan last year protested. Several protests descended into violence.

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China's regulators are therefore cautious and vigilant. The People's Bank of China regularly evaluates the market. In its most recent assessment on financial stability, the central bank classified 422 small lenders as high-risk, which collectively represented a very small portion of bank assets.

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The government announced its intention to create an expanded regulator to enhance overnight in the banking industry as leading policymakers gathered at the National People's Congress this week. To the surprise of several investors, the government made no mention of financial innovation or the growth of the business. President Xi Jinping believes that banks do not require innovation. They simply need to feel secure.

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China has already put in place a variety of mechanisms that would have drawn regulators' attention. Trade Algo reports that SVB does business with approximately half of all American businesses backed by venture capital. China would have been alarmed since authorities restrict lenders' overexposure to a single sector. Regarding the recent unexpected closure of Silvergate Capital Corp., one of the leading lenders in the cryptocurrency business, it would never have happened in China. All bitcoin transactions are outright prohibited by the government.

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Yes, China regulates excessively. Yet if Washington's top aim is financial stability and security, it is important to consider whether the US government's lax treatment of small banks is appropriate. Maybe all it takes is a few traumatic experiences to understand that bigger lenders are equally dangerous.  

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