The “Japanisation” of banks is the new illness of contemporary finance. Stemming from Japan, it is expanding progressively, especially in Europe. How does this disorder translate? Well, banks are drifting away from their core business – lending to companies – because companies have lower credit needs in a no-growth environment and, furthermore, companies tend, more and more, to get financing directly from the markets. Also, there is no growth to speak of in personal loans, with purchasing power stagnating and an already high level of debt. This leaves one last borrower whose needs remain insatiable: the State. Since the deposited money has to be recycled somewhere, banks keep on purchasing more sovereign debt.
Japanese banks are thus looking more and more like bond funds with deposits as liabilities and public sector bonds as assets. With this model, it’s a little like “heads I win, tails you lose”: if interest rates remain frozen at zero, bank margins fall and bankruptcy follows; if rates rise significantly, the value of the bonds plummets, and bankruptcy follows. Only a progressive, controlled rise of rates could bring hope of getting things back to normal, without too much damage... but is it even possible? How could one raise interest rates when there is no growth and debt – both public and private – has never ceased to grow since the 2008 crisis? This would equate to a form of strangulation.
Japan, where this illness originated, is very much ahead of Europe, just taking into account its public debt, getting close to 300% of GDP, or three times the average level of the euro zone. But European banks are traveling the same road – a low demand for credit coupled with an increase in purchasing public debt. And insurers are doing the same by abandoning securities and real estate investments in favour of public bonds.
In the end, the financial system is losing its function of transforming savings into investments. Its reason for existing is simply being called into question. If banks have a lesser volume of credit, if individuals look for alternative means, such as the market, or with crowd funding, and if insurers do not finance the real economy anymore, if they are content with acquiring public debt, what’s their purpose?
The system is biting its own tail: the savings in banks and insurance companies are essentially used to finance the public debt instead of the real economy... no wonder the economy is doing badly. The government thinks it is wise to counter with even more public spending to “spur” growth, albeit it only makes things worse by running deficits. Meanwhile, the debt is growing, which makes it impossible to raise rates at a normal level. Only a serious financial crisis shall get us out of this vicious circle...
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Philippe Herlin Finance Researcher / Member of the Goldbroker.com Editorial Team
Philippe Herlin is a researcher in finance and a doctor in economics of the Conservatoire National des Arts et Métiers in Paris. A proponent of extreme-risk thinkers like Benoît Mandelbrot and Nassim Taleb, and of the Austrian School of Economics, he will be bringing his own views on the actual crisis, the Eurozone, the public debts and the banking system. Having written a book on gold that has become a reference (L’or, un placement d’avenir, Eyrolles 2012), he wishes to see gold play a growing role in our economies, all the way to its full re-monetization.