The banks’ plumbing systems appear to be blocked


The blog’s favourite financial journalist, Gillian Tett, has written an excellent article summarising the similarities between today’s problems in the western banking system, and those of Japan’s during the ‘lost decade’ of the 1990’s.

Her point is that although central banks are pouring money into the system via ‘quantitative easing’, it is clearly not reaching the wider economy. In particular, small and medium sized enterprises (SMEs), find bank loans very difficult to obtain.

Tett says she observed exactly the same issue in Japan, when working there 10 years ago. As now, politicians were jumping and down, urging the banks to lend. The government even set quotas for SME lending. But Tett describes the results as “almost comical”. Her research uncovered, for example, that some banks were meeting their SME quota via loans to Toyota subsidiaries; hardly the result that was required.

Fast forward 10 years, and it seems the same process is being repeated. Large corporates, seen as low-risk, can tap markets – Dow raised $2.75bn to repay borrowings this week. But as Tett notes, “numerous small or risky corporate ventures in the West complain they cannot get loans”. Consumers also struggle. And she concludes that “the pipes (of the banking system) are badly clogged, if not broken“.

As a result, Tett says we are seeing a “backflow” of the liquidity created by the central bank money. It is ending up back with the government, via purchases of government bonds. In Japan, this process caused long-term interest rates to fall to 1%. The blog suspects that the same outcome could occur in some western countries too, if the plumbing of the banking system remains blocked.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. He also serves as a Global Expert for the World Economic Forum. The aim of this blog is to share ideas about the influences that may shape the chemical industry and the global economy over the next 12 – 18 months. It looks behind today’s headlines, to understand what may happen next in critical areas such as oil prices, China and Emerging Markets, currencies, autos, housing, economic growth and the environment. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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