Recently, the global financial sector, particularly the banking industry, has shown multiple signs of distress. These developments involve not only regional financial institutions but also several internationally renowned banks. It is evident that anxiety is mounting across the global banking landscape, potentially signaling the emergence of systemic risks in the industry.
Some notable recent indicators of risk within the banking sector include:
First, several regionally significant financial institutions have reported substantial losses. For example, Norinchukin Bank of Japan, which has a history spanning over a century, recorded a net loss of JPY 1.8078 trillion in fiscal year 2024, the largest loss in its history. In its annual report, the bank attributed the loss to heightened uncertainty in the market outlook caused by the Trump administration, which has kept long-term interest rates elevated in global bond markets. Due to a misjudgment that interest rates would decline, the bank made erroneous bets on U.S. and European bonds. Over the past year, it was forced to sell more than JPY 10 trillion worth of these bonds, resulting in massive losses. This issue is not confined to Japan. The volatility in long-term bond yields has affected other regions as well. These developments highlight not only the vulnerability of traditionally perceived “safe haven” assets like sovereign bonds in times of economic uncertainty, but also indicate the deep interconnectedness of today’s global financial markets. The Federal Reserve, on one side, has maintained a firm stance against cutting interest rates, signaling a clear divergence from the Trump administration’s position. On the other side are the major purchasers of U.S. Treasuries, including banks, who had been anticipating rate cuts. The increasingly tense standoff between a Fed unwilling to ease and a Trump administration pushing for lower rates has exacerbated risks in the bond and interest rate markets, prompting many participants to exit.
Secondly, there are growing concerns about a potential downturn in the U.S. economy, and several major institutions have openly expressed a pessimistic outlook. For instance, JPMorgan Chase CEO Jamie Dimon criticized both the U.S. government and the Fed for excessive fiscal spending and quantitative easing, warning that the bond market is “bound to crack” under the mounting pressure of rising debt. At the same time, Citigroup CEO Jane Fraser outlined a three-phase impact of Trump’s tariff policies on the U.S. economy. The first phase involves consumers and businesses rushing to make purchases in anticipation of price increases due to tariffs. The second phase, which Fraser believes the U.S. is currently entering, is characterized by heightened uncertainty that causes businesses to pause investment and hiring. In the third phase, as the Trump administration's tariff policies become more clearly defined, the adverse effects on consumers are expected to become even more pronounced.
Thirdly, several influential global banks have increased their credit loss provisions, even in cases where their financial performance has exceeded expectations. This clearly shows that these institutions are cautious amid economic uncertainty. For example, JPMorgan Chase, which reported first-quarter revenue and profits above market forecasts, still set aside USD 3.3 billion in loan loss provisions, a 75% increase compared to the same period last year. As CEO Jamie Dimon noted during a conference call, the bank holds capital well above regulatory requirements and maintains ample liquidity. Similarly, HSBC raised its expected credit losses by USD 202 million in the first quarter of 2025. The bank also forecasted that global loan demand would remain weak throughout the year. This conservative stance is driven by growing uncertainty, market volatility, and a deteriorating economic outlook influenced by rising tariffs and escalating geopolitical tensions. HSBC Group CEO Georges Elhedery stated that the bank has conducted multiple rounds of stress testing on its income streams and credit portfolio to assess the potential impact of a deeper economic downturn triggered by tariff-related shocks.
It is worth noting that the concentration of the U.S. banking sector has increased significantly over the past decade. While this consolidation has improved efficiency, it may also amplify financial risks. If even a single giant bank were to encounter serious trouble, it could trigger a shockwave across the entire global financial system.
According to the Financial Times, in the first three quarters of 2024, the four largest U.S. banks, namely JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo, accounted for 44% of the entire U.S. banking sector’s profits, the highest share since 2015. This trend of increasing concentration shows no sign of slowing. Former Barclays CEO Bob Diamond once remarked that the number of U.S. banks could decline by more than half over the next three years. Therefore, if a financial crisis were to occur and any of these major banks were to experience serious issues, the consequences could be severe.
The recent failures of Silicon Valley Bank and First Republic Bank have already served as a wake-up call, highlighting the critical role large banks play in the financial system. If a similar crisis were to impact one or more of these banking giants, it could very well trigger a broader systemic shock.
Although the aforementioned risks are currently concentrated in other countries, China too must remain highly vigilant and work to mitigate potential threats before they escalate .
On the one hand, bond yields in China are currently at low levels. However, when fiscal stimulus is implemented in the future, the country could face a scenario similar to what is currently unfolding in the U.S. and Europe, that is, a rise in government bond yields, which could in turn lead to losses for financial institutions holding those bonds. In fact, early signs of this have already emerged. In late May, during the auction of 50-year government bonds, the winning yield reached 2.10%, exceeding the valuation of 2.025% for the same maturity. This triggered a rise in yields across long-term bonds of various durations on the same day. Hence, China’s future monetary policy will need to be forward-looking and carefully managed to guard against sharp interest rate fluctuations driven by fiscal expansion, which could undermine the stability of the financial system.
On the other hand, it is essential for it to remain alert to the risk of foreign economic shocks spreading into China. According to the latest customs data, China’s exposure to foreign trade remains substantial. At the same time, as the country continues to deepen its opening-up, foreign capital has become increasingly involved in China’s financial markets, particularly in sectors such as lending, insurance, and securities. Therefore, if the U.S. or Europe were to fall into recession, China could face negative impacts on its exports, credit markets, and capital flows. In response, China must not only utilize a range of policy tools to stabilize the domestic economy and leverage its comparative advantages amid global turbulence, but also work to strengthen the resilience of its financial institutions in order to mitigate the drag of international financial risks. Recent initiatives, such as the Ministry of Finance injecting capital into major state-owned banks, local governments recapitalizing regional banks, and mergers among small and mid-sized banks, are all significant steps in this direction.
Overall, major international banks have shown a lack of confidence and a rather cautious outlook on the global economic future. This growing sense of uncertainty is particularly concerning given the current context of a sluggish global economy and intensifying geopolitical tensions, raising the risk of a potential new wave of systemic financial crisis. For China’s policymakers, the situation presents a dual challenge, namely managing both domestic and external risks. On one hand, it is essential to deploy an effective mix of policies to stabilize the economic fundamentals and strengthen the resilience of the financial system. On the other hand, it is equally important to turn crises into opportunities within a complex international environment and potentially gain greater strategic initiative in the evolving global competitive landscape.
Final analysis conclusion:
Recently, numerous financial institutions have shown a range of not-so-optimistic signs, which we interpret as early warning signs of a potential crisis. These concerns are not confined to regional entities but also involve globally significant banks, underscoring the need for heightened vigilance. In the case of China, it would be crucial for it to adopt a forward-looking approach and take proactive measures to guard against emerging risks.
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Peng Maosheng is a researcher at ANBOUND, an independent think tank.
