"Chinese Bank Failures, Climate Change, and Prolonged Negative Interest Rates Could Trigger Financial Crisis"
[Asia Economy Reporter Minji Lee] Baring Asset Management has diagnosed that the bankruptcy of Chinese banks and the deterioration of banks due to climate change could trigger a global financial crisis, and emphasized the need to proactively improve the financial market system.
On the 25th, Christopher Smart, head of the Baring Investment Institute, stated in a report titled "The Need for Active Response to Prevent Global Crises" that “to reduce the possibility of a financial crisis, factors causing bank insolvency and bankruptcy must be examined, and central banks of each country should closely monitor the financial market system.”
Smart identified five causes that could trigger a financial crisis: △ bankruptcy of Chinese banks △ deterioration of shadow banks △ large bank insolvency due to climate change △ interruption of financial transactions caused by cyberattacks △ bank bankruptcy due to the burden of negative interest rates.
He explained, “Although the Chinese government still has the funds and capacity to control the impact of capital outflows, risks are increasing as capital outflows rise,” adding, “The issue of Chinese bank bankruptcies is not just a problem for China alone, so the reliability and transparency of the financial system must be enhanced to respond to crises originating from China.”
Smart also predicted that the deterioration of shadow banks, which are subject to fewer regulations than banks such as pension funds, asset management companies, and insurance companies, could be a cause of financial crises. He said, “Most of the loans from shadow banks are contracted, making it difficult to detect early signs of insolvency unlike banks,” and “Considering that financial authorities do not fully grasp the overall situation of fund movements, there is a possibility of large-scale losses depending on the interrelations.”
Furthermore, Smart emphasized, “Due to climate change such as floods and poor harvests, the asset value of banks is highly likely to decrease,” and “Financial authorities are already requiring banks and insurance companies to assess risks related to climate change.”
In addition, he pointed out, “As cyberattacks on major financial transactions are occurring, it is urgent for all countries to establish cyber regulations that can be implemented,” and “Since negative interest rates are prolonged, the negative impact of bank profit erosion on investors must also be considered.”
Finally, he said, “The next financial crisis will start from one of these system vulnerabilities,” and “Since it will take a long time to solve these issues, proactive responses must begin now.”
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