Could the U.S. Banking Crisis Follow in Japan's Footsteps?

Nine more banks failed in the U.S. last Friday bringing the total to 115 this year. Still many more are at risk of failure through the end of this year and next year. Despite the talk of recovery, banks are not out of the woods yet. Though the financials in the S&P 500 are up about 12% so far this year, bank stocks have a long ways to go before they return to the normalcy that existed pre-2008.

So what does the future hold for the U.S. banking? Will the U.S. banking industry go through the similar phases that the Japanese banks went through in the past following their big crisis?

The following chart shows the various phases in Japan’s banking crisis:

click to enlarge

Source: Regional Economic Outlook: Asia and Pacific, IMF

In the first phase from 1990 through 1996, the banking crisis unraveled in Japan and was followed by a fragile recovery followed by the withdrawal of fiscal stimulus. If this were to occur in the U.S., we are now only in the second year of phase one. Another 6 more years may have to go before phase one ends if the U.S. follows Japan exactly.

In the next phase, renewed stress followed due to monetary tightening. Japan also attempted a second recovery in this period. So from 1990 to 2000, Japan had its lost decade during which recovery was attempted twice. Finally after the dot com crash, private demand picked up and many Japanese banks and companies were restructured which led to a sustained recovery from 2001 through 2007. Since Japan exports heavily to the largest emerging market of China, the trade helped the Japanese economy gain a solid footing after a decade of flat to sluggish growth. It is too early to tell what the US banking industry will look like in the next few years.

As more and more small community banks disappear, regional banks such as U.S. Bank (USB), Regions Financial (RF), PNC Bank (PNC), etc. will become larger by acquiring the assets of failed banks on the cheap.

Comments

[Dave Wrixon:]

If you are trying to use Japan as a Model you have to understand that the real thing is going to be many orders of magnitude bigger, because the extent of the financial reckless was so much bigger and the reach of those involved so much greater.

Nov 03 09:30 AM

[Mad Hedge F...:]

vgy As much as I want to find a trade in Japan and therefore have an excuse to go there again, my searches have recently come up empty. With America maintaining its lead in innovation and the creation of new business models, and China taking over the world’s low end manufacturing, it is hard to see a future for Japan. Can a country of 127 million live only off of the high end manufacturing of luxury cars, video games, and electronics? The country is increasingly looking like a “has been” emerging market. During my career, I watched GDP growth rates fall from a white hot 10% in the sixties, to 4% in the seventies and eighties, to 1% in the nineties and the early 21st century. Are we flat lining at 0% in the teens? That leaves fertile ground only for stock pickers who are willing to do the local spade work to find one hit wonders like Toyota and Fast Retail. That is a job best left to country specialists, like my old friend, 40 year veteran Ed Merner, who runs the Atlantis Japan Growth Fund (LSE-AJG) traded in London, which has shot up a sizzling 80% in six months.

Nov 03 11:13 AM

[ryanclarke:]

The U.S. can't do a repeat of the Japan experience because oil isn't/wasn't valued in yen ... it's valued in dollars ... until the Fed's ZIRP policy finally induces $200 drum oil ... and the world tells the Fed to do something about inflation ... and take the depression.

Nov 03 03:39 PM

[I am not a ...:]

What it is not realized ,obviously ,is the China doesn't have any Sony's ,Toyoda's ,Honda's etc who used the ideas generated in west and improved the concepts to such a degree that they could be produced on a vast inexpensive scale. In the case of the Sony company,the founder actually created salable products from his own ideas ,something the USA hasn't done for quite some decades and China never has and, so far it appears, it never will.

The japanese Banking Crises ,which was revealed to the world at the time of the Kobe Earth quake was more about profligate lending and lack of fiscal discipline than any industrial shortcomings .
I could go on for hours about this subject having seen it first hand .

Nov 03 03:56 PM