Rising Rates and Rising Risks: When Banks Shift From Creditors to Debtors

Economic

Summary:

As deposit rates continue to climb in early 2026, banking experts warn that deteriorating asset quality and excessive leverage in real estate lending could turn banks from creditors into vulnerable debt holders if risk controls are not tightened...

Escalating Deposit Rates Signal Intensifying Funding Pressure

Entering 2026, the upward trend in deposit interest rates shows no sign of cooling. The increase is no longer limited to a few institutions but has spread across the system, from state-owned banks to joint-stock commercial lenders. This broad-based adjustment reflects intensifying competition for liquidity, suggesting that banks are under growing pressure to secure stable funding sources.

Among state-owned commercial banks, all four institutions with government capital, Agribank, Vietcombank, VietinBank, and BIDV, had raised deposit rates to a higher common level by January 8. This synchronized movement indicates a system-wide recalibration rather than isolated policy choices by individual banks.

Under current State Bank regulations, the interest rate ceiling for deposits with maturities from one to five months remains at 4.75 percent per year. While this level was rarely applied three months earlier, it has now become widespread. Nine banks, including BVBank, OCB, PGBank, VIB, PVCombank, Sacombank, TPBank, VCBNeo, and VPBank, are applying the ceiling across all maturities from one to five months. Nam A Bank has joined this trend at the two-month tenor, bringing the number of banks applying the ceiling to ten. At the three-month maturity, thirteen banks are now offering the maximum rate, including Techcombank, LPBank, and MBV alongside the earlier group. For four- and five-month terms, NCB has also adopted the ceiling, further reinforcing the uniformity of pricing at the short end of the curve.

Early-Year Adjustments And The Cost Of Capital

Beyond the short-term maturities, several banks have continued to adjust deposit rates since the beginning of the year. VPBank, MSB, and ABBank have increased rates, with typical adjustments ranging from 0.2 to 0.4 percentage points per year. These increases are concentrated mainly in medium- and long-term tenors, reflecting banks’ efforts to stabilize funding structures amid rising uncertainty.

As funding costs rise, lending rates are unlikely to remain unchanged. From a market mechanism perspective, higher input costs tend to be transmitted into lending prices as banks seek to preserve interest margins. Although the timing and magnitude of these adjustments may differ across institutions, the underlying pressure on lending rates is structural rather than temporary.

Weak Credit Absorption And The Growing Risk Of Bad Debt

The challenge becomes more acute when higher lending rates interact with an economy whose purchasing power and credit absorption capacity have not recovered proportionally. In this environment, even modest increases in borrowing costs can place additional strain on corporate and household balance sheets. The relationship between higher lending rates and rising non-performing loans is not automatic, but the correlation becomes stronger when borrowers already operate with thin margins and elevated leverage.

At the talk show titled “Rising Interest Rates Suppress Production: Will The Real Estate Bubble Return?”, banking expert Pham Xuan Hoe, former Deputy Director of the Banking Strategy Institute, emphasized that bad debt risks remain persistent and increasingly visible. According to his assessment, non-performing loans continued to rise throughout 2025, particularly from June onward. At the same time, the banking system’s provisioning coverage ratio has declined to around 80 percent, down from levels exceeding 100 percent previously. This reduction indicates a thinner buffer against credit losses and heightens systemic vulnerability.

Real Estate Leverage As A Structural Source Of Risk

One of the most significant sources of potential bad debt, according to Pham Xuan Hoe, lies in the real estate sector and its sophisticated financing practices. He described how developers establish multiple subsidiaries to repeatedly transfer projects at inflated prices, thereby increasing collateral values and expanding borrowing capacity.

In a typical scenario, one subsidiary may borrow approximately 50 billion VND to conduct land clearance. After completing initial procedures, the project is transferred to another entity at a much higher valuation, for example from 60 billion VND to 200 billion VND. Once legal documentation is finalized, banks may extend additional credit based on the higher valuation. When this process is repeated in an environment of continuously rising prices, financial risk accumulates rapidly. The link between inflated valuations and credit expansion here is correlational, but the repeated recycling of leverage creates conditions where losses can quickly propagate if prices reverse.

Even more dangerous is lending to affiliated or “backyard” enterprises. Pham Xuan Hoe pointed to the SCB and Van Thinh Phat case as a clear illustration of systemic risk when confidence among depositors and bond investors collapses. When SCB lost its ability to meet obligations, the consequences extended far beyond a single institution, forcing economy-wide liquidity support and emergency measures to stabilize public trust.

When Property Markets Deflate

If the real estate bubble deflates, the two most severely affected groups are banks and small-scale speculators holding land plots. Falling prices trap these investors in illiquid positions, making it difficult to exit and leading to a rapid expansion of bad debt. In such conditions, if inflation edges higher while non-performing loans increase, policy tightening becomes unavoidable. This dynamic has already begun to emerge, with some commercial banks tightening real estate lending standards.

To address bad debt risks and improve the effectiveness of credit allocation, Pham Xuan Hoe proposed two key policy directions. The first involves raising the risk weighting applied to real estate lending, for example from 150 percent to 200 percent, to redirect capital toward productive and cash-generating business activities. The second focuses on stricter financial assessment of real estate developers. Minimum quick ratios should reach at least 0.8, and total debt relative to equity should not exceed four to five times. Beyond this threshold, lending should be halted. Implementing such measures would require coordination between the Ministry of Finance and the State Bank.

From a broader economic perspective, real estate must ultimately serve housing needs or generate real cash flows. Yet many villas along Thang Long Boulevard or in Me Linh remain vacant, tying up capital without contributing to economic output. This idle capital does not create social value and increases financial fragility.

Debt-Fueled Land Banks And Systemic Exposure

Another critical issue concerns the actual land banks held by developers, which warrants closer scrutiny from the Ministry of Construction. Much of this land has been accumulated using bank loans or bond financing. While financially sound and transparent firms with credit ratings may still access bond markets, current bond yields of 11 to 12 percent are already very high. By the end of 2025, real estate inventories had reached substantial levels. When firms become trapped in highly leveraged positions without viable exit options, banking sector balance sheets inevitably absorb the consequences.

In practice, when real estate markets encounter distress, banks and speculators bear the greatest risks, while large developers may be relatively insulated. Pham Xuan Hoe summarized this imbalance with a stark industry saying: if a bank lends 10 while a firm contributes 90, the bank is the creditor, but if a firm contributes only 10 and the bank lends 90, the bank effectively becomes the debtor, standing while lending and kneeling when collecting repayments.

Looking ahead, if monetary policy is loosened in 2026 to pursue double-digit growth targets, the possibility that liquidity will once again flow disproportionately into real estate is a serious concern. Without stronger safeguards, such an outcome would deepen existing vulnerabilities rather than support sustainable growth.

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Benjamin Carter

Bond

Political

Forex

Remarks of Officials

Economic

Central Bank

Stocks

Bank of Japan Governor Kazuo Ueda has affirmed his commitment to raising interest rates, signaling that intense speculation over a snap political election will not derail the central bank's monetary policy.

Speaking in Tokyo on Thursday, Ueda stated the BOJ's position clearly. "We will keep raising rates and adjust the degree of monetary easing in line with the improvement in the economy and inflation if our outlook materializes," he said at a conference hosted by the Regional Banks Association of Japan.

His remarks confirm that the market volatility triggered by political rumors has not forced the central bank to alter its course. Ueda’s speech closely mirrored his statements from last week, before talk of a potential national vote began to escalate.

Most economists are not expecting a policy change at the BOJ's upcoming meeting on January 23. The consensus points to a possible rate hike occurring around June.

Market Reacts to Snap Election Rumors

The political speculation centers on Prime Minister Sanae Takaichi, who local media reports suggest may dissolve parliament next week to call a snap election. This would be her first time overseeing a national vote since taking office last October.

Financial markets reacted strongly to the news this week. Japanese stocks soared, while bonds and the yen weakened on expectations that a new electoral mandate could empower the prime minister to push for more expansionary fiscal measures.

The yen subsequently fell to its weakest level against the dollar since July 2024, the last time Japan's finance authorities intervened to support the currency. It traded at approximately 159.20 per dollar on Thursday afternoon in Tokyo.

Weakening Yen Complicates Inflation Fight

A depreciating yen presents a significant challenge for the Bank of Japan by driving up the cost of imports and adding to broader inflationary pressures.

This dynamic complicates Governor Ueda's objective of achieving stable price growth. Japan’s key inflation gauge has already remained at or above the BOJ's 2% target for more than three and a half years.

Ueda noted that wages and prices are on a path of gradual increase. "Wages and inflation are likely to keep rising gradually," he said. "An appropriate adjustment of monetary easing will usher in the smooth achievement of our price target and longer-term growth in our economy."

The BOJ raised its benchmark interest rate to 0.75% last month, its highest point since 1995. While most observers anticipate a steady pace of hikes, roughly once every six months, some analysts believe a persistently weak yen could compel the central bank to act sooner.

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Isaac Bennett

Remarks of Officials

Economic

China–U.S. Trade War

Political

The United States government has established new rules for selling high-performance AI chips to China, representing a significant policy change. These regulations directly impact companies like Nvidia and its advanced H200 chips, introducing a controlled process for exports that previously faced a complete block.

New Guardrails for Chip Exports

Under the revised framework, several conditions must be met before advanced AI chips can be shipped to Chinese buyers. This marks a departure from prior restrictions and introduces a multi-step approval process.

Key requirements now include:

• Performance Verification: All chips must undergo testing by an independent third-party lab to verify their AI capabilities.

• Supply Cap: Chinese customers cannot purchase more than 50% of the total chip volume sold to American customers.

• Domestic Availability: Nvidia is required to demonstrate it has a sufficient supply of H200 chips available in the United States.

• End-User Vetting: Chinese companies must prove they have adequate security measures in place and commit to not using the chips for military purposes.

These stipulations were not part of the previous export policy.

A Reversal of Biden-Era Restrictions

This move reverses the Biden administration's policy, which had blocked sales of advanced AI chips to China altogether. The Trump administration, with guidance from White House AI director David Sacks, argues that allowing controlled sales could discourage Chinese tech firms like Huawei from accelerating their own high-end chip design efforts to compete with Nvidia and AMD.

When he announced the policy shift last month, President Donald Trump stated the sales would proceed "under conditions that allow for continued strong National Security." This contrasts with an earlier proposal from Trump to permit sales in exchange for a 25% fee, a plan that drew criticism from both political parties over concerns it could bolster Beijing's military and undermine America's technological edge in AI.

Experts Skeptical of Enforcement

Analysts and former officials have raised serious questions about the new policy's effectiveness and enforceability.

Jay Goldberg, a stock analyst at Seaport Research, called the export limits a "middle-ground solution" that may be difficult to monitor. He described the policy as a "Band-Aid" attempting to cover a significant gap among U.S. policymakers.

"As we have seen, companies have found ways to get access to those chips, and the U.S. government appears highly transactional in their approach to chip exports," Goldberg noted.

Saif Khan, a former director of technology and national security on the White House National Security Council under Joe Biden, warned that the rule would provide a major boost to China's AI programs. "The rule would allow about two million advanced AI chips like the H200 to China, an amount equal to the compute owned today by a typical U.S. frontier AI company," Khan said. He added that the administration will struggle to enforce requirements preventing Chinese cloud providers from supporting nefarious activities.

These enforcement challenges are significant, especially given past smuggling operations valued at $160 million.

China's Massive Demand Outstrips Supply

The policy change comes as Chinese technology companies display an enormous appetite for advanced hardware. According to a report last month, Chinese firms have already placed orders for over 2 million Nvidia H200 chips, each costing around $27,000. This demand far exceeds Nvidia's current reported stock of 700,000 units.

At the Consumer Electronics Show, Nvidia CEO Jensen Huang confirmed that the company was ramping up H200 production. He cited strong demand from China and other nations as a key driver behind rising rental prices for H200 chips operating in cloud data centers.

While the U.S. has reportedly begun a review that could clear the first chip shipments to China, it remains uncertain whether the new restrictions will be effectively enforced or if Beijing will ultimately permit the sales domestically.

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Gerik

Economic

Commodity

Record Export Volumes In A Year Of Policy Tightening

China exported 62,585 metric tons of rare earths in 2025, marking the strongest annual performance in more than a decade. The increase came despite Beijing introducing new export controls in April on seven medium and heavy rare earth elements and related magnets. These materials are critical inputs across consumer electronics, automotive manufacturing, renewable energy systems, and defense equipment, making China’s export performance closely watched by global supply chains. The rise in total shipments reflects sustained external demand rather than regulatory loosening, indicating that restrictions reshaped timing and composition of exports rather than suppressing volumes outright.

The introduction of export controls in April, widely seen as a response to elevated U.S. tariffs, led to an immediate and sharp drop in shipments of rare earth magnets during April and May. This decline was directly linked to regulatory barriers rather than a collapse in demand, as buyers faced uncertainty over licensing and compliance. The relationship here is causal, with policy intervention temporarily constraining trade flows even as end-user demand remained intact.

Gradual Recovery Driven By Trade Adjustments

From June onward, exports began to recover steadily. This rebound followed a series of agreements reached between China, the United States, and Europe, which helped clarify regulatory frameworks and restore confidence among overseas buyers. The recovery suggests that once uncertainty around controls eased, pent-up demand translated back into physical shipments. This pattern highlights how geopolitical and trade negotiations can influence commodity flows indirectly by shaping expectations and procurement behavior.

In December, rare earth exports fell 20% from November to 4,392 tons, reflecting softer overseas buying after stockpiling ahead of the Christmas period. However, the December figure was still 32% higher than the same month in 2024, underscoring the strength of the underlying trend. Analysts noted that many overseas buyers had front-loaded purchases in November, when exports jumped 26.5% from October, to secure supply before the holiday slowdown. This sequencing reflects inventory management practices rather than weakening demand fundamentals.

China’s ability to deliver record rare earth export volumes despite tighter controls highlights its continued dominance in the sector. While restrictions introduced volatility at specific points in the year, they did not prevent an overall expansion in exports. This outcome suggests that global reliance on Chinese rare earth supply remains structurally intact, even as buyers and governments seek diversification. For now, policy actions have altered trade patterns at the margin but have not fundamentally reduced China’s role as the world’s primary supplier.

Source: Reuters

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Julia Daniels

Remarks of Officials

Data Interpretation

Economic

Central Bank

Poland's central bank is at a crossroads, with its recent streak of interest rate cuts likely coming to a halt. Analysts overwhelmingly expect the Monetary Policy Council (MPC) to hold its benchmark rate at 4% this week, but a surprisingly low inflation report has made the decision far from certain.

A Pause in Easing Expected

After cutting borrowing costs at its last five meetings, the central bank appears ready to shift to a wait-and-see approach. Governor Adam Glapinski has signaled a desire to evaluate the impact of the past easing, which saw rates lowered by a total of 175 basis points in six steps last year.

This view is supported by a Bloomberg survey, where 29 of 32 economists predicted that the MPC will keep rates on hold. Fellow panelist Henryk Wnorowski also suggested that the next potential cut would not occur until March at the earliest.

Low Inflation Complicates the Decision

Despite the consensus for a pause, the decision is not a foregone conclusion. The primary reason for the uncertainty is an unexpected dip in inflation, which fell below the central bank’s 2.5% target in December. This development strengthens the argument for continued monetary easing.

The division among policymakers is clear. MPC member Ireneusz Dabrowski commented last week that another rate reduction was equally as likely as holding firm. Analysts at PKO Bank Polski SA are in the minority forecasting a quarter-point cut, stating in a note, "The outcome of the MPC meeting will remain uncertain until the very end."

New Council Member Adds Unpredictability

Adding another layer of unpredictability is a change in the council's composition. This week’s meeting will be the first for Marcin Zarzecki, a new member appointed by President Karol Nawrocki. Zarzecki, whose views on monetary policy are not publicly known, replaces Cezary Kochalski, whose term concluded in December. His vote could prove decisive in what is expected to be a close call.

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Justin

Economic

Remarks of Officials

Data Interpretation

Central Bank

The December Consumer Price Index (CPI) report was as complex as analysts predicted, but the real story of inflation isn't in the headline numbers. A closer look at money supply and central bank activity reveals pressures that the official data may be missing.

Decoding the December CPI Numbers

At first glance, the December inflation data seemed to align with expectations, offering a sliver of optimism for markets hoping for future monetary easing.

The overall CPI rose 0.3% month-on-month, holding the annual inflation rate steady at 2.7%. When stripping out volatile food and energy costs, the core CPI increased by 0.2% for the month, with the annual rate unchanged at 2.6%. This slightly cooler-than-expected core reading fueled speculation that the Federal Reserve might continue easing monetary policy in 2026.

However, a persistent trend lies beneath the surface. Over the last six available readings, core CPI has posted increases of 0.2%, 0.3%, 0.3%, 0.2%, 0.2%, and 0.2%. This pattern annualizes to a rate of 2.8%, showing that core inflation has been stuck in this range for over a year.

A detailed breakdown of the December report shows specific price pressures:

• Shelter: Increased by 0.4%

• Food: Surged by 0.7%

• Energy: Rose by 0.3%, even as gasoline prices fell 0.4%

• Services: Grew by 0.3%

• Used Cars & Trucks: Posted the largest decline, falling 1.1%

A table showing the monthly percentage change in the Consumer Price Index for various categories from June to December 2025.

The Limits of Official Inflation Data

It’s crucial to approach the CPI report with caution. The data's reliability has been questioned, particularly following a November report some critics described as heavily estimated.

Furthermore, the government's methodology for calculating CPI was revised in the 1990s, leading to a formula that many argue systematically understates the true rise in the cost of living. If the formula from the 1970s were still in use, today's official CPI figures would likely be closer to 6%.

Even based on the current official data, inflation remains well above the Federal Reserve's target. As Ellen Zentner, chief economic strategist at Morgan Stanley, noted, the situation feels familiar.

"We've seen this movie before—inflation isn't reheating, but it remains above target," Zentner stated. "Today's inflation report doesn't give the Fed what it needs to cut interest rates later this month."

The True Driver: Accelerating Money Supply

The CPI measures price changes in a specific basket of goods, but it only captures a symptom of inflation. Historically, economists defined inflation as an increase in the supply of money and credit. Rising prices are the consequence of this monetary expansion.

By this fundamental measure, inflation is not only present but accelerating. The M2 money supply is currently growing at its fastest rate since July 2022. After hitting a low in October 2023, the money supply has resumed its upward trajectory, now surpassing its pandemic-era peak as money creation has quickened in recent months.

A chart from the Federal Reserve Economic Data (FRED) shows the M2 money stock in billions of dollars from 1959 to November 2025, highlighting a sharp increase beginning in 2020.

The Fed's Quiet Relaunch of QE

Further evidence of rising inflationary pressure comes from the Federal Reserve's balance sheet, which is once again expanding.

Last month, the central bank resumed purchasing U.S. Treasuries with newly created money, effectively restarting its quantitative easing (QE) program. This direct injection of liquidity into the financial system is, by definition, inflationary.

A graph illustrates the recent trend of the Federal Reserve's total assets, showing a decline through most of 2025 followed by a distinct increase in December.

The Fed's Catch-22: No Easy Way Out

This leads to a fundamental conflict for the central bank. The Fed is caught in a Catch-22: it needs to loosen monetary policy through rate cuts and QE to support a debt-laden economy, but it also needs higher rates to bring price inflation back under control. It cannot do both at the same time.

Any "cooler than expected" CPI report provides political cover to prioritize easing, despite official rhetoric aimed at managing expectations. This dynamic ensures that even if official price metrics cool temporarily, the underlying inflationary forces are likely to grow stronger.

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Gerik

Economic

Commodity

A New Milestone For Silver And Gold

Silver vaulted past the $90-per-ounce threshold, reaching as high as $91.5535, marking an unprecedented milestone for the metal. Gold followed closely, trading within $10 of its all-time high. This advance reflects a continuation of the powerful rally that began last year rather than a short-lived reaction to a single data release. December inflation data in the United States came in softer than feared, although economists noted that the figures were temporarily suppressed by distortions linked to the prolonged government shutdown. That outcome strengthened market confidence that monetary policy conditions may eventually ease further, supporting non-yielding assets such as precious metals.

Markets currently expect the Federal Reserve to pause rate cuts for several months, yet swaps pricing still points to at least two cuts later in the year. This outlook has reinforced demand for gold and silver through a direct transmission channel, as lower expected real rates tend to improve the relative attractiveness of metals. At the same time, renewed political attacks on Federal Reserve Chair Jerome Powell have revived concerns about central bank autonomy. While global central bankers and senior Wall Street executives have publicly defended Powell, the episode has increased sensitivity to institutional risk. This relationship is largely correlational rather than mechanical, with investor confidence responding to perceived governance stability rather than immediate changes in policy settings.

Geopolitical Stress And Haven Demand

Safe-haven demand has been amplified by a tense geopolitical environment. Developments such as the U.S. capture of Venezuela’s leader, renewed rhetoric over Greenland, and escalating unrest in Iran have heightened perceptions of global instability. These events have not directly disrupted precious metal supply, but they have elevated risk aversion, which historically correlates with stronger inflows into gold and silver. Citigroup responded to this backdrop by upgrading its three-month price targets to $5,000 an ounce for gold and $100 an ounce for silver, underscoring expectations that elevated uncertainty will continue to support prices.

Silver’s outperformance relative to gold has been notable. The metal gained roughly 150 percent last year, driven by a combination of a short squeeze in October, persistent physical tightness in London, and aggressive speculative positioning. Analysts also point to a broader rotation into commodities as investors seek diversification away from traditional financial assets. According to Lotus Asset Management’s Hao Hong, the rally still has room to extend, with prices potentially reaching $150 an ounce by year-end. This projection reflects momentum and positioning dynamics rather than a guaranteed price path.

Supply Constraints And Trade Policy Risks

Uncertainty surrounding U.S. trade policy has added another layer of complexity. Traders are watching the outcome of a Section 232 investigation that could result in import tariffs on silver. Fear of such measures has already altered physical flows, with large quantities of silver reportedly remaining in the United States rather than circulating globally. This has tightened availability elsewhere, reinforcing price strength. The link here is indirect, as policy uncertainty influences inventory behavior, which then affects market balance.

The latest surge highlights the scale of investment flows into precious metals. Trading volumes on Comex and the Shanghai Futures Exchange have remained elevated since late December, signaling sustained speculative and institutional participation. Platinum and palladium have also joined the rally, each gaining more than 4 percent, suggesting broad-based interest rather than isolated enthusiasm for silver alone. The Bloomberg Dollar Spot Index remained steady, removing currency volatility as a primary driver of the move.

Strategists caution that while demand for precious metals as a hedge against inflation and financial instability is likely to persist, gains in 2026 may not match the extraordinary pace seen last year. Some analysts expect gold to outperform silver over time due to its deeper liquidity and stronger association with geopolitical risk. Even so, the break above $90 has reinforced silver’s status as a high-beta expression of macro uncertainty, leaving prices highly sensitive to shifts in monetary expectations, policy credibility, and global risk sentiment.