World Economy

The US could end up crippling the world's largest banks as it takes on North Korea

Key Points
  • Major Chinese banks could find themselves on the sanctions list as the U.S. mulls harsher actions against North Korea
  • China's "big four" lenders are the largest in the world by assets, beating major global banks such as JPMorgan Chase and HSBC
All roads lead to Beijing on North Korea solution: Analyst

As the U.S. mulls its next move against North Korea, some have suggested that sanctioning the major Chinese banks could be the most effective way to pressure the rogue nation into halting its nuclear program.

Targeting the big lenders from the world's second-largest economy is not a new idea. And it would not necessarily just be a way to lash out at Beijing for not controlling Pyongyang sufficiently: Some Chinese banks, like the Bank of China, are said to have helped North Korea evade sanctions.

But the big Chinese banks have so far avoided any punishments by the U.S., which has instead blacklisted smaller players such as Bank of Dandong for financing North Korea. That could change after the hermit nation claimed over the weekend that it successfully tested a hydrogen bomb — a much more powerful weapon compared to those it previously tested.

In response, President Donald Trump tweeted that the U.S. is considering "stopping all trade with any country doing business with North Korea" and Treasury Secretary Steve Mnuchin is reportedly drafting a harsher sanctions package.

Donald Trump tweet: The United States is considering, in addition to other options, stopping all trade with any country doing business with North Korea.

China is North Korea's largest trading partner, accounting for 85 percent of the latter's trade and has a "fair amount of leverage" over the hermit nation, Bejoy Das Gupta, Asia Pacific chief economist at the Institute of International Finance told CNBC's "Squawk Box."

In an August announcement by the Treasury Department, more Chinese entities were added to the U.S. sanctions list. Mnuchin at the time said the Treasury "will continue to increase pressure on North Korea" by, among others, "isolating them from the American financial system."

All big four state-owned banks in China have in recent years increased their presence in the U.S., where their operations now include providing loans, issuing bonds and financing trade activities.

Who are the major Chinese banks?

The four major Chinese banks are also the largest lenders by assets in the world, according to the latest ranking by S&P Global Market Intelligence.

The Industrial and Commercial Bank of China is the world's largest bank with $3.47 trillion in total assets as of the end of 2016, S&P said. Another three Chinese banks round up the top four of the global ranking: China Construction Bank, Agricultural Bank of China and Bank of China. Those three lenders have assets between $2.60 trillion and $3.02 trillion.

Putin says pressure on North Korea is both 'futile' and a 'dead-end road'

In comparison, the largest American bank is JPMorgan Chase at sixth place on the S&P ranking, with assets of $2.49 trillion as of the end of 2016. The biggest European bank, HSBC, was seventh with $2.37 trillion worth of assets.

The growing size of the Chinese lenders has also allowed Asia's largest economy to overtake the euro zone as the world's biggest banking system last year with total assets of $33 trillion, according to an analysis by the Financial Times.

Rep. Pete King tweet: UN must impose oil embargo on N Korea ASAP. If China or Russia veto, US must sanction anyone doing business with NK, including Bank of China.

The health of the Chinese financial system is closely-watched as banks hold more than 90 percent of total assets in the world's second-largest economy, according to Reuters. Sanctioning the largest players would thus have "international economy and markets" implications, Scott Seaman, director for Asia at geopolitical consultancy Eurasia Group, told CNBC's "Squawk Box."

"The U.S. Treasury Department has often been hesitant to expand the secondary sanction regime to include, for example, restrictions on Chinese SOEs (state-owned enterprises) and Chinese large banks in part because the Chinese government will react very negatively, but also it will have an impact on international economy and markets," Seaman said.

"But we do expect the U.S. to come up with additional restrictions on things that will probably make Beijing upset," he added.