U.S., China to hold more financial shock exercises, Yellen says

(Reuters) – The U.S. and China are deepening co-operation on financial stability issues, Treasury Secretary Janet Yellen said on Monday, with more simulations of financial shocks due after a recent exercise on tackling the failure of a large bank.

Wrapping up four days of meetings in China, Yellen issued a stern warning to Chinese banks that facilitating transactions providing material support or dual-use goods to Russia for its Ukraine war effort would lead to “significant consequences.”

Yellen said the financial stability exercises were developed by a U.S.-China financial working group formed last year when she first visited to try to rebuild economic ties.

The group, led by representatives of the U.S. Treasury and the People’s Bank of China, last met in Beijing in January.

“Just like military leaders need a hotline in a crisis, American and Chinese financial regulators must be able to communicate to prevent financial stresses from turning into crises with tremendous ramifications for our citizens and the international community,” Yellen told a news conference.

She discussed financial stability issues on Monday with PBOC Governor Pan Gongsheng at the central bank’s headquarters in Beijing.

Speaking on condition of anonymity, a senior U.S. Treasury official said the new exercises would take place in April or May.

One would cover operational resilience co-ordination risks prompted by a major external shock, such as a natural disaster, a cyberattack on a bank, or a new pandemic, while the other would cover insurance system impacts from climate change risks.

There was no immediate comment from the PBOC.
The exercises will help establish lines of communication between U.S. and Chinese regulators and identify areas of potential cross-border contagion and other risks, the U.S. official said.

The official did not disclose specific results, but said both Chinese and U.S. officials made suggestions on how to better coordinate during episodes of stress.

NO NAMES MENTIONED

“It’s generic in the sense that there was no trigger of concern about a particular bank. There was no name of a bank or anything like that used,” the official added.

Risks from cross-border external shocks came into sharp focus last November, when a ransomware attack on the Industrial and Commercial Bank of China’s (ICBC) U.S. arm disrupted its systems and left some $9 billion worth of trades temporarily unsettled in the U.S. Treasury debt market.

The Treasury has long held such simulations with other countries that have large financial systems, such as Japan, Britain and European countries. The official said the U.S. and China have not had such exercises and consultations so far.

Although direct financial linkages between the U.S. and China are not large enough for China’s economic slowdown to affect U.S. growth, the official said it was important to start to map out risks.

“Countries with large financial systems need to do this with each other. And we simply hadn’t been doing it with China. So now we’ve started in that direction,” the official said.

On Friday in the southern city of Guangzhou, Yellen mentioned the large bank failure exercise, opens new tab as a tangible example of improved economic dialogue between Washington and Beijing.