How many of our banks are real life zombies?

Be prepared for the next great transfer of wealth. Buy physical silver and storable food.

investmentwatchblog.com / by Shaun Richards / February 15th, 2016

As we travel through the credit crunch era we have the fear that we will repeat the experience of Japan and find ourselves experiencing what has become called the “lost decade” which began in the early 1990s and is still ongoing. We have seen a reminder of that only this morning as the Japanese economy shrunk again (by 1.4% annualised as they measure it) in the last quarter of 2014.This provides the link to today’s topic which is the banks and what we have failed to do. Back in the day when I was knee-high to a grasshopper in financial market terms I worked in Tokyo for a time and continued to work on Japanese issues when I returned to the UK. At that time the health of the Japanese banks was on everyone’s minds and as the Nikkei 225 equity index fell we were told that they were fine at the following levels. It started at 26,000 the 24,000 then 22,000 then 20,000 then 18,000 then 16,000 and so on.

The obvious point is that if there were serious concerns about banking health at an index level of 26,000 then they had to be completely underwater by 20,000. Yet the Japanese establishment preferred to look the other way and in banking terms might have contributed some ideas to the Cranberries.

Zombie, zombie, zombie

The consequences of this were known before the credit crunch as this paper of the Ideas section of the St. Louis Federal Reserve Bank  from 2006 confirms.

We start with the well-known observation that most large Japanese banks were only able to comply with capital standards because regulators were lax in their inspections. To facilitate this forbearance the banks often engaged in sham loan restructurings that kept credit flowing to otherwise insolvent borrowers (that we call zombies). Thus, the normal competitive outcome whereby the zombies would shed workers and lose market share was thwarted.

Thus the one thing we needed to avoid in banking terms was to be singing along with The Vapors.

Turning Japanese I think I’m turning Japanese I really think so

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Thanks to BrotherJohnF