TheChek News Flow

U.S. objects to rival’s push for self-sufficiency in $80 billion business and opens trade probe

SINGAPORE—China isn’t satisfied with becoming the world’s dominant maker of electric vehicles. It wants the chips inside to be Chinese-made too.

Not long ago, almost all the chips in Chinese cars relied on manufacturing by the likes of Texas Instruments TXN -1.68%decrease; red down pointing triangle and Germany’s Infineon IFX -1.32%decrease; red down pointing triangle. Today, the use of homemade chips has risen to around 15%, say people involved in the industry, and it is poised to rise further.

Last week, the U.S. opened an investigation into China’s production of chips made with mature technology that are often used in areas such as autos and defense. U.S. Trade Representative Katherine Tai said there was evidence China used “extensive anticompetitive and non-market means” to achieve self-sufficiency, and the Commerce Department has said subsidized low-cost Chinese chip makers might flood the global market and drive down prices.

Beijing is making little secret of its industrial policy, reasoning that controlling the brains inside the world’s most important consumer product is too important to be left to market forces. It is setting targets for homegrown chips and supporting domestic chip makers through state semiconductor funds including a $47 billion one started in May.

Foreign companies in the car-chip business, which has annual revenue of more than $80 billion, face a choice of producing more in China or losing sales. Many are choosing the former, upending the lean and efficient global supply chain for chips.

“If the world wants to decouple, you can do China for China and non-China for non-China,” said Texas Instruments’ chief executive, Haviv Ilan, at a December investor briefing. “If the world stays open, and I hope it will, you can continue to have this diverse supply chain.”

The U.S. and Europe are also promoting domestic semiconductor production. A 2022 U.S. law passed under President Biden is funding tens of billions of dollars in subsidies.

Industry executives said many of the integrated circuits China produces for vehicles are low-end commodity chips, and it is years away from complete self-sufficiency. Even so, China’s progress shows how it can make strides in producing items for which it previously relied on the U.S., Europe and Japan.

“It is very foolish to underestimate the ability of the Chinese to be competitive,” said Handel Jones, founder of consulting firm International Business Strategies, who has worked with Chinese chip companies. “To get the automotive market in China, the strategy has to be: designed and made in China for the China market.”

Semiconductors have become one of the main battlegrounds in the U.S.-China tech rivalry, for both commercial and national-security reasons. In recent weeks, the two nations have engaged in a tit-for-tat bout of sanctions over high-end chips and raw materials.

The rise of Chinese auto chips doesn’t stem solely from government fiat. The concentration of the world’s biggest EV-manufacturing industry in China acts as a gravitational force for anyone who makes EV parts.

Today’s gasoline-engine cars often contain more than 700 chips to power automatic doors, run entertainment systems and control the brakes, among many other tasks, and EVs need more than twice that number. Typically those chips use mature or “legacy” technology.

Semiconductors used in automotive applications accounted for about 15% of the $530 billion semiconductor market in 2023, up from 8% in 2020, according to researcher Gartner. In addition to longstanding U.S., European and Japanese makers, Qualcomm and Nvidia have entered the market with an eye on autonomous driving systems.

U.S. curbs on exports of chips to China generally don’t hit legacy chips. But Beijing still prefers self-sufficiency. China was the world’s biggest buyer of semiconductor-making equipment in 2024, snapping up machines able to produce these commodity chips.

China’s state-backed automobile association earlier this month cautioned companies against buying American processors, calling them unsafe and unreliable, the first time it had issued such a message publicly.

Earlier in 2024, officials from China’s Ministry of Industry and Information Technology asked major carmakers to report every quarter how many locally made chips they bought, according to people briefed on the matter.

China leads the world in the rollout of electric and plug-in hybrid vehicles. About half of the 20 million vehicles sold in China in 2024 through November fell into one of those two categories.

That gives local semiconductor makers an opportunity. A government-backed automotive chip association, founded in 2020, took out a booth at China’s premier car exhibition in April for the first time and showcased dozens of China-made processors.

Chinese automakers say they prefer to source locally to ensure steady supply. Some also find it easier to work with chip designers at home who can move quickly and are more willing to make customized products. This is critical because Chinese carmakers are accustomed to refreshing their EV lineups frequently like smartphones, rather than like gasoline cars updated every five years or so.

The first Chinese chips to gain share are analog and power semiconductors controlling simpler parts such as windshield wipers. As more advanced locally produced semiconductors are tested and qualified, analysts say Western rivals will begin to feel the squeeze.

Beijing-based Horizon Robotics, a rival to Nvidia and Qualcomm in car chips, said it had 25 automaker customers as of June 2024, up from 14 in 2021. Horizon said domestic suppliers could “better cater to the demand and preference of the Chinese customers.”

A teardown by researchers at UBS in 2023 found that all of the power semiconductors in the BYD Seal, a popular sedan in China, came from Chinese suppliers.

In September, Wilmington, Mass.-based Analog Devices said it lost some market share in 2023 owing to China’s push for indigenous chips but conditions stabilized in 2024. “It is still a growth market, but we’re unsure if it’s the fastest growth market going forward,” said Michael Lucarelli, the company’s vice president for investor relations.

For now, Western players are trying to keep their edge in China. Switzerland-based STMicroelectronics formed a joint venture to produce chips for cars and industrial power sectors with a state-linked company in 2023, while Dutch chip maker NXP said in November it wanted to localize production of processors for Chinese automakers.

Chief Executive Kurt Sievers said the market has turned upside down from the days when Western carmakers were NXP’s lead customers and the company would sell the resulting products to Chinese customers.

Now, with Chinese carmakers leading in self-driving vehicles and electrification, “we start to use them and leverage them as lead customers and eventually sell them to the West,” Sievers said.

Stockpicking funds suffer record $450bn of outflows

Shift into passive strategies and ETFs has accelerated as performance of pricier mutual funds lags behind benchmarks

Investors pulled a record $450bn out of actively managed stock funds this year, as a shift into cheaper index-tracking investments reshapes the asset management industry.

The outflows from stockpicking mutual funds eclipse last year’s previous high of $413bn, according to data from EPFR, and underline how passive investing and exchange traded funds are hollowing out the once-dominant market for active mutual funds.

Traditional stockpicking funds have struggled to justify their relatively high fees in recent years, with their performance lagging behind the gains for Wall Street indices powered by big technology stocks.

The exodus from active strategies has gathered pace as older investors, who typically favour them, cash out and younger savers turn instead to cheaper passive strategies.

“People need to invest to retire and at some point they have to withdraw,” said Adam Sabban, a senior research analyst at Morningstar. “The investor base for active equity funds skews older. New dollars are much more likely to make their way into an index ETF than an active mutual fund.”

Shares in asset managers with large stockpicking businesses, such as US groups Franklin Resources and T Rowe Price, and Schroders and Abrdn in the UK, have lagged far behind the world’s largest asset manager BlackRock, which has a large ETF and index fund business. They have lost out by an even wider margin to alternatives groups such as Blackstone, KKR and Apollo, which invest in unlisted assets such as private equity, private credit and real estate.

T Rowe Price, Franklin Templeton, Schroders and $2.7tn asset manager Capital Group, which is privately owned and has a large mutual fund business, were among the groups that suffered the largest outflows in 2024, according to Morningstar Direct data. All declined to comment.

The dominance of US big tech stocks has made it even tougher for active managers, which typically invest less than benchmark indices in such companies.

Wall Street’s so-called Magnificent Seven — Nvidia, Apple, Microsoft, Alphabet, Amazon, Meta and Tesla — have driven the bulk of the US market gains this year.

“If you’re an institutional investor you allocate to really expensive talented teams that are not going to own Microsoft and Apple because it’s hard for them to have a real insight into a company that’s studied by everyone and owned by everyone,” said Stan Miranda, founder of Partners Capital, which provides outsourced chief investment officer services.

“So they generally look at smaller, less-followed companies and guess what, they were all underweight the Magnificent Seven.”

The average actively managed core US large company strategy has returned 20 per cent over one year and 13 per cent annually over the past five years, after taking account of fees, according to Morningstar data. Similar passive funds have offered returns of 23 per cent and 14 per cent respectively.

The annual expense ratio of such active funds of 0.45 percentage points was nine times higher than the 0.05 percentage point equivalent for benchmark-tracking funds.

The outflows from stockpicking mutual funds also highlight the growing dominance of ETFs, funds that are themselves listed on a stock exchange and offer US tax advantages and greater flexibility for many investors.

Investors have poured $1.7tn into ETFs this year, pushing the industry’s total assets up 30 per cent to $15tn, according to data from research group ETFGI.

The rush of inflows shows growing use of the ETF structure, which offers the ability to trade and price fund shares throughout the trading day, for a wider variety of strategies beyond passive index-tracking.

Many traditional mutual fund houses, including Capital, T Rowe Price and Fidelity, are seeking to woo the next generation of customers by repackaging their active strategies as ETFs, with some success.

BlackRock and FDIC on course for early 2025 clash over bank stakes

US watchdog is seeking greater scrutiny over asset management giant’s vast holdings in lenders

The Federal Deposit Insurance Corporation and BlackRock are headed for a January showdown over the US watchdog’s efforts to step up its oversight of investors who take large stakes in small and midsized banks.

The FDIC has given the $11.5tn investment giant until January 10 to accept proposed new compliance measures whenever it owns more than 10 per cent of the outstanding shares in FDIC-supervised banks, people familiar with the situation said.

Some politicians and regulators have grown increasingly concerned about the growing power of BlackRock, Vanguard and State Street as a result of the vast flood of money flowing into “passive” funds that buy every company in an index. 

These critics worry that the scale of the holdings could allow big passive fund managers to influence companies that are vital to the economy, by, for example, pushing them to address climate change.

Vanguard reached a deal last week in which it promised to attest to the FDIC that it would remain a passive investor for a much larger group of banks than it had in the past. The new group includes lenders that are part of a larger bank holding company. Vanguard also for the first time agreed to specific oversight by the FDIC to ensure that it was abiding by its “passivity agreements”. 

But BlackRock and investment industry groups have complained that strengthening the FDIC passivity agreement requirements would duplicate oversight by the US Federal Reserve, raise compliance costs and make bank stocks less desirable investments. 

“BlackRock strongly opposes the proposal, which would harm investors, disrupt the flow of capital to the economy, and undermine the efficacy” of the existing regulatory framework, the group wrote in an October comment letter.

BlackRock proposed its own version of passivity agreements to the FDIC in early December that did not include the compliance measures to which Vanguard has now agreed. The watchdog contacted BlackRock on Friday after making public Vanguard’s deal and set a deadline of January 10 for it to sign something similar, the people familiar with the situation said.

FDIC director Jonathan McKernan, who has been publicly pushing for new passivity agreements, has repeatedly said robust compliance measures are essential. 

Thirty-nine US community and regional banks are directly affected by the compliance fight because BlackRock owns more than 10 per cent of each.

The FDIC has pushed back the deadline for passivity agreements several times after first setting it for October 31. The watchdog is expected to get a new chair and several new board members after Donald Trump takes office as US president on January 20.

BlackRock and the FDIC declined to comment. State Street has not been affected by the battle because it is a bank and therefore already more tightly regulated.

Defence industry set for deal surge as companies look to expand in AI and space

Large contractors expected to use growing cash piles to invest in high-growth areas

Defence companies are primed for a surge in deal activity as many look to deploy growing cash piles to invest in technologies such as artificial intelligence, sophisticated drones and space systems.

Global conflicts including the war in Ukraine have accelerated the development of new technologies, which is expected to drive dealmaking in the next few years as companies look to expand in fast-growing areas.

The leading 15 defence contractors are forecast to log free cash flow of about $50bn in 2026, according to an analysis by Vertical Research Partners for the Financial Times — almost double their combined cash flow at the end of 2021.

Although larger companies are expected to continue to spend that money on share buybacks and higher dividend payouts, deal activity is also expected to increase.

Michael Sion, partner at consultants Bain & Co, said he expected a pick-up in aerospace and defence M&A, and forecast an influx of funding from private equity and venture capital firms.

“Many companies are looking to expand what they offer to get ready for advanced technologies,” he said. Larger companies, he added, would chase fast-growing parts of defence such as space and defence electronics.

Meanwhile, the value of venture capital deals in the defence sector has increased 18-fold in the past decade, according to a new report by Bain. Growth has been driven in part by an increasing convergence of commercial and defence technologies.

Many investors, in particular in Europe, have also been wary of backing the sector over ethical concerns but attitudes are changing following Russia’s invasion of Ukraine almost three years ago.

Recent corporate deals in the industry include BAE System’s acquisition of Ball Aerospace, a US-based supplier of mission-critical space systems, for $5.6bn, which was announced in 2023. US defence prime L3Harris agreed to buy rocket engine maker Aerojet Rocketdyne at the end of 2022.

In November, drone manufacturer AeroVironment said it would acquire BlueHalo, a company known for its drone swarm and counter-drone technology, for about $4.1bn through an all-share transaction. Wahid Nawabi, chief executive of AeroVironment, said the company planned to be a “next generation” prime contractor which would be focused on “defence technology”.

In a recent Financial Times interview Nawabi said he wanted to create a company that did “all the things that the [US] Department of Defense is focused on and needs”. That included, he said, “unmanned systems, loitering munitions, space communications . . . electronic warfare and cyber security”.

There was “likely to be activity in what you might call the ‘defence technology’ space such as drones, AI and lasers”, said Robert Stallard, analyst at Vertical Research Partners. But consolidation at the top end of the sector among the large prime contractors was unlikely, he added.

Even with an “‘anything goes’ Trump Department of Justice, the US defence industry is super consolidated at the prime level”, Stallard said.

In Europe, meanwhile there “should be consolidation and M&A, but getting governments to agree is another thing altogether”, said Stallard.

Joint ventures and teaming are a “much easier step, allowing the Europeans to pool forces without getting politicians animated over loss of sovereign capability”.

Bain’s Sion said given the modernisation needs of the defence industry, there was an opportunity for private capital to play a larger role. Private capital, he said, can help to plug a “funding gap” between US defence requirements and defence budgets.

It can help to solve some of the “challenges of the defence industrial base”, such as “capacity growth, improving operations and delivery,” he added.

Could 2025 be the year when Europe surprises investors positively?

Amid much pessimism there are also several things that may well lift the mood

As 2024 draws to an end, it is hard to be optimistic about Europe. Its politics become ever more fragmented and polarised. Germany may be without a stable government until at least after elections in late February, France may have to wait until 2027 when President Emmanuel Macron’s term ends.

Growth has stalled, unemployment is expected to rise. The economy has been held back by burdensome regulation, high energy prices, weak demographics, growing competition in manufacturing sectors and a failure to keep pace with Chinese and American technological advances. Much of the continent is grappling with excessive debt even as governments are under pressure to deliver big increases in defence spending.

The consensus forecast is for growth of just 1.1 per cent next year. Some are even gloomier: Bank of America expects growth of just 0.9 per cent in 2025. Even this assumes that Donald Trump imposes only modest tariffs on Europe on his return to the White House. Risks to growth are overwhelmingly to the downside, according to the latest European Central Bank survey of independent economists.

This pessimism is reflected in markets. European stocks may be trading at close to record highs but they have sharply underperformed US equities. The Euro Stoxx 600 index now trades at a record 40 per cent discount to the S&P 500 index based on next year’s forecast earnings. While US households have never been more optimistic about stocks and US fund managers have never held less cash, global fund managers are underweight European equities and no one expects them to outperform other markets in 2025, according to the latest Bank of America survey of investors.

Yet so much pessimism also sets a very low bar for upside surprises. What could go right in Europe in 2025 that could lift the mood? Several things spring to mind.

The most immediate is that the ECB stops worrying about inflation and moves decisively to support growth. Cutting its benchmark interest rate to 1.5 per cent or below from the current 3.0 per cent could help revive confidence in sectors that have been struggling, including real estate and construction, reckons Gilles Moëc, group chief economist at Axa. It would also support decarbonisation projects that run on long time horizons and ease some of the fiscal pressure on governments.

Second, an early end to the war in Ukraine on terms that Kyiv could accept would remove one of the darkest clouds that have hung over the continental economy over the past two and a half years, particularly if it led to lower energy prices. The rebuilding of Ukraine and its integration into the EU single market would stimulate economic activity. That would be a gradual process but the boost to confidence would be immediate. Such a deal may seem unlikely now, but recent events in Syria are a reminder at how quickly the wheel of geopolitical fortune can turn.

Another boost could come via relaxation of Germany’s debt brake. Friedrich Merz, the frontrunner to be the country’s next chancellor, may currently be ruling this out, at least until the election. But it is hard to square his Christian Democratic Union party’s commitment to increase defence spending and cut taxes without more borrowing. With everyone from Angela Merkel to the current president of the Bundesbank now throwing their weight behind reform of the debt brake, looser fiscal policy seems likely. Meanwhile, a determined programme of supply-side reforms could lift German growth by up to 0.5 percentage points next year, reckons Holger Schmieding, chief economist of Berenberg Bank.

A further upside surprise could be progress in implementing Mario Draghi’s recent recommendations on how to boost the EU’s competitiveness. Expectations are currently low, not least because of opposition to any fresh issuance of common debt. Yet much of the former Italian prime minister’s deregulatory agenda does not require extra funding or even legislation. Besides, there are signs that resistance to new debt issuance to fund defence spending may be weakening as Europe scrambles to provide for its own security and forestall Trump’s tariff threats.

Some argue that progress on reform is unlikely because Europe lacks strong leadership, particularly in France and Germany. Yet others are filling the void. Ursula von der Leyen’s decision to fly to Brazil in the first week of her new mandate to sign the EU-Mercosur trade agreement, for example, showed that the European Commission president is unafraid to take political risks in pursuit of a deal that is patently in the bloc’s economic and geopolitical interest. She at least seems to recognise the gravity of the moment — and is prepared to rise to it. Perhaps 2025 will be the year when Europe positively surprises us.

Eurozone growth threatened by global trade war, economists warn

Financial Times poll points to gloomy outlook with little upside potential for common currency area

A possible global trade war and regional political paralysis are the two biggest threats facing the Eurozone economy in 2025, according to a Financial Times poll of 72 economists.

US president-elect Donald Trump has pledged to impose levies of up to 20 per cent on all US imports, with the tariffs rising to 60 per cent on China, once he returns to the White House on January 20.

If Trump is true to his word, the tariffs would represent the most significant rise in US protectionism since the era of the Great Depression and raise the prospect of retaliation elsewhere.

The Eurozone, which holds a large trade surplus with the US, is seen as acutely exposed to not only higher tariffs but also the threat of China dumping cheap products on global markets in response to Trump’s actions.

“Trump’s second presidency is now the single biggest political and economic risk,” said Mujtaba Rahman, managing director for Europe at analysts Eurasia Group. “Europe will be exposed to tariffs and a push by Trump to force more aggressive decoupling from China.”

A trade conflict triggered by tariffs imposed by the US is almost taken as a given by economists polled by the FT: 69 per cent of respondents consider it likely, while 68 per cent warn that such a scenario is the biggest threat for the region next year.

Almost all of the respondents — 81 per cent — said a second Trump term will weigh on Eurozone growth.

The fallout of Trump’s trade policies is likely to dent output in Europe even before they have been put in place, economists say. “The expectations of Trump tariffs . . . provide companies with a strong incentive to wait with investments until some of the uncertainty is resolved,” said Tomasz Wieladek of T Rowe Price.

On average, the 72 respondents expect the Eurozone economy to expand by just 0.9 per cent. This would be the third year of subpar growth in a row and is below the 1.1 per cent that the European Central Bank’s staff predicted in December.

But there is broad consensus that the single currency area can avoid a recession. John Llewellyn, a former senior economist at the OECD and Lehman Brothers who is now a partner at Independent Economics, is the biggest outlier.

Predicting the Eurozone economy would end next year 1 per cent smaller than at the start, Llewellyn said “investors at present are unwarrantedly complacent about what President Trump is likely to bring”.

“Economic stability is far more fragile than the modern generation recognises,” he said.

Most of the polled economists — 61 per cent — back ECB president Christine Lagarde’s call to EU policymakers to engage in trade negotiations with Trump to avoid an all-out trade war.

“[The EU] may want to use the threat of retaliation as part of the negotiation. But ultimately, tariffs are a self-inflicted harm, and the EU would be better off not using them,” said Isabelle Mateos y Lago, chief economist at BNP Paribas.

Several economists point to the EU’s vast experience in trade talks and its position as one of the world’s biggest trading blocks. “The EU is far from in a weak position,” said Christian Dustmann, director of Berlin-based economic think-tank Rockwool Foundation.

However, a vocal minority warned that seeking a trade deal with the US would only encourage more aggressive action. “Trump has the mentality of a playground bully,” said Kamil Kovar, senior economist at Moody’s.

Carsten Brzeski, global head of macro at ING Bank, said tariffs were not the only threat to the European economy stemming from the US in 2024. “US tax cuts, deregulation and lower energy prices will also make the US economy more attractive compared with the Eurozone.”

Next to geopolitical risks, Europe’s inability to fix its homemade problems is seen as a key risk by close to a third of all polled.

Ulrich Kater, chief economist at Germany’s Deka Bank, said Europe was soon going to resemble the “late Habsburg empire”. It was falling behind economically and technologically, bogged down by bureaucracy and dominated by “melancholic remembrance of its former greatness”.

Asked about potential reasons for optimism, one in five referred to declining interest rates and some hope of an uptick in consumer demand.

A similar share of analysts believe Germany’s snap elections in February might lead to tweaks in the country’s tight constitutional debt brake and increase investment.

“The psychological depression in Germany could be turned around if a new coalition would be able to present a coherent reform programme and lift the debt brake,” said Moritz Kraemer of German lender LBBW.

However, Marcel Fratzscher, director of Berlin-based economic think-tank DIW, was less optimistic. “Don’t expect a new German government to hit the ground running and provide a much-needed boost to confidence,” he said.

While the centre-right Christian Democratic Union is poised to be the strongest party, coalition negotiations might be complex and can drag on for months. Moreover, CDU party boss and lead candidate Friedrich Merz has so far only shown a limited appetite for changes to the debt brake.

Paradoxically, a fifth of all economists hope the gloom could become a blessing in disguise as the situation might become so bad that Europe might eventually embark on necessary reforms.

“A hostile international political climate presents an opportunity for European governance,” said Lena Komileva, chief economist at (g+)economics consultancy.

LBBW’s Kraemer stressed that expectations were “now so low all around that there is also some potential for upside surprises”.

Pressure is ratcheting up on US banks over debanking

There is a good chance the Trump administration will take action over the issue after complaints from the right

More than a year after Nigel Farage whipped up a fuss in Britain about debanking, a similar debate is brewing in the US. One catalyst has been venture capitalist Marc Andreessen, who complained in an interview with Joe Rogan in late November about investors, founders and their companies being kicked out of the banking system. 

Andreessen had two gripes. First, he claimed banks were labelling people on the right with a “politically exposed” regulatory designation and subsequently cutting business ties with them. And second, industries that are frowned upon by the government or could threaten traditional financial companies, such as crypto businesses, are having their banking access taken away.

This built on recent complaints from Melania Trump that her bank terminated her account after the January 6 Capitol attack and declined to open one for her son Barron. On the right, such decisions have collectively been dubbed “Operation Choke Point 2.0”, a term borrowed from the Obama-era scheme that sought to limit banking access for controversial industries such as payday lenders. 

There’s a good chance a second Donald Trump administration will take action here. David Sacks, the incoming artificial intelligence and crypto tsar, said there were “too many stories of people being hurt by Operation Choke Point 2.0” and that it needed to be examined. 

And Brian Brooks, the comptroller of the currency in Trump’s first term, has suggested the new administration might revive his past attempt to introduce so-called fair access rules that would have would have required banks to have a financial reason for dropping a client. Those rules could not be finalised before the first term ended.

For some Trump supporters, debanking is part of a Deep State conspiracy But there are several reasons that might explain decisions. Bureaucracy is one. Since 2008, thousands of pages of new rules and billions of dollars in fines have meant banks are more risk averse about the sort of clients they take on. When a client relationship is ended, the communication from the bank tends to be frustratingly vague and terse, leading to speculation over the reasons. 

Regulators swear that they do not tell banks which customers they should or should not take. But they can create chilling effects with their actions, as in 2022 when the Federal Deposit Insurance Corporation told banks they supervise to notify them about any crypto business they wanted to do. Was this a politicised move by the Biden administration averse to crypto or were regulators frightened about new avenues for money laundering and sanctions evasion? Either way it had an impact on banks.

“With . . . crypto becoming more intertwined with the formal financial system and banking sector, banks are petrified of running afoul of sanctions,” said Edward Fishman, a former US state department official and author of Chokepoints: American Power in the Age of Economic Warfare.

Another issue is that the complaints from venture capitalists and crypto companies comes less than two years on from the failure of three mid-sized US banks that catered to these industries after liquidity problems: Silicon Valley Bank, Signature and Silvergate. When a bank closes, this can make it difficult for some clients to find new banks, particularly if they operate in an area that is a regulatory focus.

Twenty years ago, the industry’s problem child was Riggs Bank, a Washington-based lender that used to describe itself as ‘’the most important bank in the most important city in the world”. With a large business in serving embassies, Riggs became embroiled in a whole host of money-laundering issues and ended up having to be sold off. What happened to the embassy banking business? Few banks wanted to step in and take the risk. 

Bank executives do make calls to curtail lending to certain industries that they take issue with. In the past, Citigroup threatened to cut off funding for some firearm retailers. JPMorgan Chase no longer finances new oil and gas drilling projects in the Arctic. Such decisions involve judgment. Is the lending right or wrong?

Even Brooks’ abandoned rule at the OCC allowed for banks to void accounts on reputational grounds if they quantify the risk more. But that is banking — assessing risk, reputational or otherwise.

Leaked military files show detailed plans for strikes on civilian infrastructure in event of war

Russia’s military prepared detailed target lists for a potential war with Japan and South Korea that included nuclear power stations and other civilian infrastructure, according to secret files from 2013-2014 seen by the Financial Times.

The strike plans, summarised in a leaked set of Russian military documents, cover 160 sites such as roads, bridges and factories, selected as targets to stop the “regrouping of troops in areas of operational purpose”.

Moscow’s acute concern about its eastern flank is highlighted in the documents, which were shown to the FT by western sources. Russian military planners fear the country’s eastern borders would be exposed in any war with Nato and vulnerable to attack from US assets and regional allies.

The documents are drawn from a cache of 29 secret Russian military files, largely focused on training officers for potential conflict on the country’s eastern frontier from 2008-14 and still seen as relevant to Russian strategy.

The FT has this year reported on how the documents contain previously unknown details on operating principles for the use of nuclear weapons and outline scenarios for war-gaming a Chinese invasion and for strikes deep inside Europe.

Asia has become central to Russian President Vladimir Putin’s strategy for pursuing the full-scale invasion of Ukraine and his broader stance against Nato.

In addition to its increased economic reliance on China, Moscow has recruited 12,000 troops from North Korea to fight in Ukraine while bolstering Pyongyang economically and militarily in return. After firing an experimental ballistic missile at Ukraine in November, Putin said “the regional conflict in Ukraine has taken on elements of a global nature”.

William Alberque, a former Nato arms control official now at the Stimson Center, said that, together, the leaked documents and recent North Korean deployment proved “once and for all that the European and Asian theatres of war are directly and inextricably linked”. “Asia cannot sit out conflict in Europe, nor can Europe sit idly by if war breaks out in Asia,” he said.

The target list for Japan and South Korea was contained in a presentation intended to explain the capabilities of the Kh-101 non-nuclear cruise missile. Experts who reviewed it for the FT said the contents suggested it was circulated in 2013 or 2014. The document is marked with the insignia of the Combined Arms Academy, a training college for senior officers.

The US has significant forces gathered in South Korea and Japan. Since the full-scale invasion of Ukraine in February 2022, both countries have joined the Washington-led export control coalition to put pressure on the Kremlin’s war machine.

Alberque said the documents showed how Russia perceived the threat from the west’s allies in Asia, who the Kremlin fears would pin down or enable a US-led attack on its military forces in the region, including missile brigades. “In a situation where Russia was going to attack Estonia out of the blue, they would have to strike US forces and enablers in Japan and Korea as well,” he said.

Dmitry Peskov, Putin’s spokesman, did not respond to a request for comment.

The first 82 sites on Russia’s target list are military in nature, such as the central and regional command headquarters of the Japanese and South Korean armed forces, radar installations, air bases and naval installations.

The remainder are civilian infrastructure sites including road and rail tunnels in Japan such as the Kanmon tunnel linking Honshu and Kyushu islands. Energy infrastructure is also a priority: the list includes 13 power plants, such as nuclear complexes in Tokai, as well as fuel refineries.

In South Korea, the top civilian targets are bridges, but the list also includes industrial sites such as the Pohang steelworks and chemical factories in Busan.

Much of the presentation concerns how a hypothetical strike might unfold using a Kh-101 non-nuclear barrage. The example chosen is Okushiritou, a Japanese radar base on a hilly offshore island. One slide, discussing such an attack, is illustrated with an animated gif of a large explosion.

The slides reveal the care Russia took in selecting the target list. A note against two South Korean command-and-control bunkers includes estimates of the force required to breach their defences. The lists also note other details such as the size and potential output of facilities.

Photographs of buildings at Okushiritou, taken from inside the Japanese radar base, are also included in the slides, along with precise measurements of target buildings and facilities.

Michito Tsuruoka, an associate professor at Keio University and a former researcher at Japan’s Ministry of Defence, said conflict with Russia was a particular challenge for Tokyo if it was the result of Russia spreading the conflict from Europe — so-called “horizontal escalation”.

“In a conflict with North Korea or China, Japan would get early warnings. We might have time to prepare and try to take action. But when it comes to a horizontal escalation from Europe, it will be a shorter warning time for Tokyo and Japan would have fewer options on its own to prevent conflict.”

While the Japanese military, and the air force in particular, has long been concerned about Russia, Tsuruoka said Russia “is not often seen as a security threat by ordinary Japanese”.

Russia and Japan have never signed an official peace treaty to end the second world war because of a dispute over the Kuril Islands. The Soviet army seized the Kurils at the end of the war in 1945 and expelled Japanese residents from the islands, which are now home to about 20,000 Russians.

Fumio Kishida, the then-prime minister of Japan, stated in January that his government was “fully committed” to negotiations on the issue.

Dmitry Medvedev, former president of Russia, said on X in response: “We don’t give a damn about the ‘feelings of the Japanese’ . . . These are not ‘disputed territories’ but Russia.”

Russia’s plans show a confidence in its missile systems that has since been proven to be overstated. The hypothetical mission against Okushiritou involved using 12 Kh-101s launched from a single Tu-160 heavy bomber. The document assesses the chance of destroying the target at 85 per cent.

However, Fabian Hoffmann, a doctoral research fellow at the University of Oslo, said that during the full-scale invasion of Ukraine, the Kh-101 proved less stealthy than anticipated and struggled to penetrate areas with layered air defences.

Hoffmann added: “The Kh-101 features an external engine, which is a common characteristic of Soviet and Russian cruise missiles. However, this design choice significantly increases the missile’s radar signature.”

Hoffmann also noted that the missile had proved less accurate than hoped. “For missile systems with limited yield that rely on pinpoint accuracy to destroy their targets, this is an obvious problem,” he said.

A second presentation on Japan and South Korea offers a rare insight into Russia’s habit of regularly probing its neighbours’ air defences.

The report summarises the mission of a pair of Tu-95 heavy bombers, sent to test the air defences of Japan and South Korea on February 24 2014. The operation coincided with Russia’s annexation of Crimea and a joint US-Korean military exercise, Foal Eagle 2014.

The Russian bombers, according to the file, left the long-range aviation command’s base at Ukrainka in the Russian Far East for a 17-hour circuit around South Korea and Japan to record the responses.

It notes that there were 18 interceptions involving 39 aircraft. The longest encounter was a 70-minute escort by a pair of Japanese F4 Phantoms which, according to the Russian pilots, were “not armed”. Only seven of the interceptions were by fighter aircraft carrying air-to-air missiles.

The route almost identically matches that taken by two Tu-142 maritime patrol aircraft earlier this year when they circumnavigated Japan during strategic exercises in the Pacific in September, including a flight over the disputed area near the Kurils.