Vision of the future? See Japan’s past

August 5, 2009

MacroScope is pleased to post the following from guest blogger Ian Bright. Bright is senior economist at ING and winner of the 2008 Rybczynski Prize from the UK Society of Business Economists. He says here that bank lending’s future can be seen in Japan’s past — and it is not good for the would-be borrower. 

“There is anger in many countries that banks are not lending money. Or more correctly, they are lending less than people want.

There is nothing new in this. Even before the failure of Lehman Brothers and the collapse of the global financial system, banks were tightening lending criteria. We even saw people who paid off their credit cards each month have them withdrawn. Small companies found that the criteria used to value the assets backing loans were made more onerous.

When the financial system virtually collapsed, governments provided money and central banks lowered rates. Many thought that this would increase the ability to get loans from banks. Indeed some governments made efforts to link the provision of public money to increased loans to particular groups, such as small businesses and homeowners.

But that is not what is happening. Banks are still reluctant to lend. And, really, nobody should be surprised.

Two factors are at work.

First, the economic cycle is working against lending. Even if a V shaped recovery takes hold in many countries, the fall in activity that has occurred is large enough to ensure an increase in bad debts for banks over the next year or two. Banks are reluctant to lend under these conditions.

But that is merely cyclical. The real problem comes from the second factor – structural changes in the ways that banks operate. No longer can banks rely on lending from each other. Retail deposits are key. And they don’t come cheaply. Furthermore, regulation will tighten soon. Banks foresee this and are reluctant to lend when the amount of capital they will need to support their loans books will increase.

The collapse of the Japanese banks in the late 1990s provides a view of what could happen. Loan growth was negative for seven years from 1998 to 2005. Loan growth is not negative in most countries but its rate of growth has been slowing.

If Japan’s experience provides any insight, don’t expect loan growth to recover soon. In fact, you could argue that worse is yet to come.”

One comment

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A very nice piece of pro banking writing, and he is right when he says that retail deposits don’t come cheap. Given that 90% of the country holds the worlds banks responsible for the current situation through irisponsible lending and also for taking large sums of money from the public purse and pocketing them instead of injecting it into the economy while operating tough policies against and in too many cases the total abandonment of the very customers they were paying to get into debt via ‘cashback’ loans i think any incoming money for the banks from the man on the street will be even more costly in future.

customers will be moving money around a lot more and selecting top interest rates over loyalty to banks whom many i’m sure will feel that threw away years worth of loyal banking when times got tough for all.

Banks have never been well liked, but everyone i speak to now has them down as public enemy number one.

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