China Central Bank to Commercial Banks: Drop Dead

image_pdfSave to pdf fileimage_printPrint

The message from today’s announcement was China central bank to commercial banks: drop dead.  Here’s the story from Marketwatch.com.

China’s central bank warned Monday that the nation’s banks need to strengthen their liquidity management and control liquidity risks.

The statement was the first by the central bank that appeared to be aimed at banks caught in a recent liquidity crunch which sent short-term rates on the interbank market soaring, with the overnight lending rate hitting an intraday high of 30% late last week.

The People’s Bank of China [PBOC], in a statement on its website, said liquidity in the banking system is at a reasonable level.

It also said banks need to maintain ‘stable and appropriate’ credit growth and adhere to its prudent monetary policy.

This is actually quite an incredible statement.  The subtext of the PBOC statement is that the central bank may refuse to act as lender of last resort if a bank experiences a liquidity crisis.  If true, that statement alone may be sufficient to create a liquidity crisis.  Apparently the PBOC still hasn’t figured out how banking works.

Share if you feel like it

About Tony Lima

Retired after teaching economics at California State Univ., East Bay (Hayward, CA). Ph.D., economics, Stanford. Also taught MBA finance at the California University of Management and Technology. Occasionally take on a consulting project if it's interesting. Other interests include wine and technology.