Zombie Banks: Avoiding the Japanese Banking Crisis in the U.S.

During the Japanese banking crisis of the 1990's, Japanese banks refused government stimulus injections because they weren't interested in complying with excessive bailout conditions per Business Week. The lack of immediate government stimulus into Japan's banks caused the Japanese banking crisis to last around a decade long, hence the term zombie banks. To avoid a similar situation in the United States, the Government and the banks have acted faster than the Japanese financial system in the 1990's.

Reasons for the prolonged Japanese banking crisis

Zombie banks' emerged in the Japanese banking crisis for several reasons listed hereafter. The Japanese banking crisis lasted from the early 1990's to the early 2000's. During much of this time period Japanese banks remained stagnant with the affect of slowing the Japanese financial system and the Japanese economy.

• Banks initially refused government stimulus

• Slowed consumer borrowing

• Political inconsistency and lack of resolve

• Yen experienced strong currency deflation against the dollar

• Asian factories owned by Japanese corporations closed

Similarities between the Japanese and U.S. banking crisis

The parallels between the Japanese and U.S. Banking crises are clear. Similarities between the two crises are evident in relation to real estate prices, bank capital reserves and failures, and the need for government intervention to help end the crisis and save' the domestic economy.

• Preceded by a housing bubble in which real estate prices collapsed

•Reduced consumer spending and borrowing

• Multiple bank failures

• Bank insolvency

• Reluctance of banks to lend money in the late 1990's

• Need for Government assistance

• Decline in equity markets

Differences between the Japanese and U.S. banking crises

There are some differences that are palpable between the Japanese and U.S. banking crises. First, the Japanese and American consumers were positioned differently within the economy, each not spending for different reasons. Second, the Japanese Government was slow to act, taking years to financially bailout' Japanese banks. These differences are part of the reason the resolution of the U.S. banking crisis was different.

• Consumers and corporations heavily indebted

• Banks unwilling to receive bailout from the Government

• Japanese consumers not indebted, rather unwilling to accumulate debt

• Lack of immediate or short-term Government intervention in crisis

• Dollar didn't devalue to the same extent as the Yen

• Japanese banks had stronger balance sheets

How the U.S. avoided the existence of zombie banks

Zombie banks resemble the walking dead, and in 2008-2009 U.S banks were faced with two choices, bankruptcy or bailout. The option to exist on life support or stagnant non-performance was avoided through market and government action. On the one hand the equity markets collapsed and confidence in banking dropped heavily causing stock and bond prices to decline. 

Banks revenue, capital reserves and ability to pay off debt on defunct financial instruments such as mortgage backed securities also failed. For example, Freddie Mac and Fannie Mae had assumed financing of too much sub-prime debt that later became a foreclosure bonanza causing solvency, net worth and ability to pay off debt on loans near to if not impossible.

Since Japanese banks, unlike U.S. banks were not heavily invested in mortgage derivatives the extent of their insolvency was more manageable causing less of a failure or bailout scenario, but rather a reduce risk catch 22 in the sense consumers weren't borrowing enough before the late 1990's, and banks weren't lending enough after this period. 

In 2008, all the U.S. private investment banks failed and large banks and/or banking insurance companies were either partially nationalized, dissolved or re-capitalized. Moreover, some banks previously engaged in risky investment banking practices changed their structure to a commercial banking model to allow improved financial protection in return for higher regulation.

The unfolding of the U.S. financial crisis was consequently more expedient and directly addressed by the U.S. Government, its banks and market. The consequences did lead to rising unemployment, steep drops in the stock market, slowed GDP growth, increased Federal deficit, and dollar devaluation. 

In the long run however, the causes and results of the U.S. financial crisis were addressed and allowed to evolve more rapidly through an expediting of fiscal and economic influences and effects such as restimulation of the U.S. financial system, capital liquidity, housing foreclosure intervention, and the Troubled Asset Relief Program (TARP).

Sources:

1. http://www.businessweek.com/globalbiz/content/mar2008/gb20080331_833526.htm
2. http://www.businessweek.com/the_thread/hotproperty/archives/2008/11/lessons_from_ja.html