How many of our banks are real life zombies?

As we travel through the credit crunch era we have the fear that we will repeat the experience of Japan and find ourselves experiencing what has become called the “lost decade” which began in the early 1990s and is still ongoing. We have seen a reminder of that only this morning as the Japanese economy shrunk again (by 1.4% annualised as they measure it) in the last quarter of 2014.This provides the link to today’s topic which is the banks and what we have failed to do. Back in the day when I was knee-high to a grasshopper in financial market terms I worked in Tokyo for a time and continued to work on Japanese issues when I returned to the UK. At that time the health of the Japanese banks was on everyone’s minds and as the Nikkei 225 equity index fell we were told that they were fine at the following levels. It started at 26,000 the 24,000 then 22,000 then 20,000 then 18,000 then 16,000 and so on.

The obvious point is that if there were serious concerns about banking health at an index level of 26,000 then they had to be completely underwater by 20,000. Yet the Japanese establishment preferred to look the other way and in banking terms might have contributed some ideas to the Cranberries.

Zombie, zombie, zombie

The consequences of this were known before the credit crunch as this paper of the Ideas section of the St. Louis Federal Reserve Bank  from 2006 confirms.

We start with the well-known observation that most large Japanese banks were only able to comply with capital standards because regulators were lax in their inspections. To facilitate this forbearance the banks often engaged in sham loan restructurings that kept credit flowing to otherwise insolvent borrowers (that we call zombies). Thus, the normal competitive outcome whereby the zombies would shed workers and lose market share was thwarted.

Thus the one thing we needed to avoid in banking terms was to be singing along with The Vapors.

Turning Japanese I think I’m turning Japanese I really think so

Bank share prices

We have seen over the past week or two something of a crisis in the banking sector. What is most revealing is that it has been a crisis of confidence. The catch here is that we have been told that there have been so many reforms and yet people do not believe in them eight years down the road. Not so far of it own lost decade is it.

One clear trigger has been Deutsche Bank of Germany where there have been fears for some time that the “zombie” concept has been at play in its derivative book. This has recently been triggered by concerns over its CoCo bonds and capital leading to its having to issue an official statement and promise to buy some bonds back. Actually the specific fears were wrong but in my view the general ones were correct. Yes banks have raised capital and are stronger in that sense but as RBS keeps showing us every year those that hit trouble keep doing so or more specifically withhold the truth and release it in penny packers. Thus the fear and mistrust cycle begins again just like in Japan.

The Vickers Report

Even Sir John Vickers is showing signs of losing the faith. I have been very critical of his report on UK banking and in a nutshell my critique is based on the fact that it did not fully apply until 2019. Or safely in “the long grass” as the apocryphal civil servant Sir Humphrey Appleby might have put it in the television series Yes Minister. So my critique had two factors. What if we had another banking crisis before it began? Secondly there was plenty of time as memories fade for it to be watered down. Today it would appear that Sir John has woken up to the latter risk. From Vox-EU.

In sum, there are reasons to query the justification for the Bank of England’s apparent policy softening on bank equity requirements.

I cannot confirm if the sound of laughter can be heard from a modern-day Sir Humphrey Appleby in Whitehall! I can confirm however that if he or she is laughing it might be at this bit.

The 3% increment would apply only to ring-fenced banks with assets above £755 billion, 40% of GDP.  There are no such banks.

Or this.

A ring-fenced bank with assets less than £175 billion (about 10% of GDP) would have no systemic risk buffer requirement at all.  (Northern Rock in 2007 is a case in point.)

Actually of course there is also likely to be laughter at HM Treasury from the equivalent of the apocryphal Sir Frank. There is a large irony here is we consider this bit.

Meanwhile the markets have something to say.  In the early weeks of 2016 bank stocks and related instruments have dropped sharply.

The man whose report was supposed to guard against this sort of thing is afraid of the market moves it was supposed to stop. Oh well, I guess we have an addition to the definition of contagion for my financial lexicon for these times. How long will it be before he finds himself singing along with Shaggy?

Why should she believe me
When I told her it wasn’t me


Yesterday saw one of the pieces on the chess board of global banking game theory fall into place as reported by the BBC.

UK banking giant HSBC has announced it is to keep its headquarters in London.

Such threats were designed as we have discussed on here to weaken banking legislation and it is hard not to conclude they have worked. There is plenty of official cheerleading on this front but I note some may be wondering about the exact motives.

You should have mentioned HSBC didn’t go to Hong Kong/China because Chinese execute criminal bankers  (@liarpoliticians)

In fact it has been so successful as a tactic that HSBC has already begun to deploy phase two.

HSBC CEO: Would Move 1k UK Jobs To Paris If UK Leaves EU (@livesquawk).

If Battersea is any guide then there will be plenty of room for the HSBC bankers as there are so many French bankers in London now.

Italian banks

Regular readers will be aware that I have long covered the problems of Italian banks. More recently – as the problems contrary to official promises have got worse  and not better – I have suggested that Mario Draghi might be tempted to shuffle the definitions of ECB QE so it can buy some of the “troubled assets”? After all it would be a case of dealing with two birds with one stone for the former supervisor of the Italian banks and head of the Bank of Italy. Someone’s fingerprints are all over this.

Thank you to Beate Reszat for drawing my attention to this earlier today. From Reuters.

The European Central Bank is in talks with the Italian government about buying bundles of bad loans as part of its asset-purchase program and accepting them as collateral from banks in return for cash, the Italian Treasury said.

Who knew the Italian Treasury did humour too?!

The move could give a big boost to a recently approved Italian scheme aimed at helping banks offload some of their 200 billion euros ($225 billion) of soured credit.

No wonder Mario Draghi has been so keen on purchases of Asset Backed Securities! Euro area taxpayers will be rather less keen I suspect when in a much later surprise they are told that there has been a “Surprise,Surprise”. Oh and the word asset may need a substantial redefinition too.


The last fortnight or so has seen banking fears return. As I have written early there are at times tactical issues with the claims but the ongoing problems of banks like RBS and Deutsche show that the strategy is correct. We even have the official denial as ECB President Mario Draghi regularly tells us that European banks are “resilient”. Last time I checked Italy was in Europe. More work for my financial lexicon I think as recall that the Irish banking collapse taught is the true meaning of “innovation”. Oh by the way we have been told over the weekend that the Greek banks are fine too. From Kathimerini.

Greek banks won’t need further recapitalization, ECB’s Nouy says

Meanwhile others seem much off message and warn of “trouble,trouble,trouble”. From Bloomberg.

Johannes Laitenberger, the EU’s director general for competition, said governments “are already pushing the boundaries” of state aid rules by devising special purpose vehicles, funding mechanisms, capital instruments and derivatives. These are designed to “circumvent the basic principle” that financial institutions receiving repeated subsidies should be wound up, he said.



22 thoughts on “How many of our banks are real life zombies?

    • Hi Chris and thanks for the link.

      This bit caught my eye “Italian bad banks will issue Asset Backed Securities (ABS) with their usual waterfall structure.”. This is because Mario Draghi spent a lot of time discussing banks today in the speech he gave and I have a feeling that the ECB will now push ahead with larger purchases of ABS. Just in time for the banks of his home country. How convenient!

      He started flagging ABS purchases around 2 years ago so he may well have been planning this for quite some time.

  1. ALL of the banks are zombies.
    I have never understood why “the West”, having seen the consequences of a massive property bubble in Japan, went down exactly the same road.
    As Bismarck said ” only a fool learns from his mistakes, the wise man learns from the mistakes of others”. To continue the epithet, presumably only the mad learn from neither; and we seem to be governed, and advised by, the mad. Needless to say, our host is very much excepted, which is why I doubt he will ever make it onto the BoE committee, unfortunately.

  2. Hello Shaun ,

    Why do or does anyone think the Banks have been fixed when virtually nothing has been done about the problems ?

    And why should we , the tax payer, have to fork out again to save private companies , that would in any other sector , be called subsidies ( as per Johannes Laitenberger) , its time to say goodbye to them …..

    Yes its the Banks again , them and their f£$% ing “innovation” that would be called by its true name in any other business – Fraud !

    So by 2018 when we are supposed to get a review and fix for the banking sector we would have lived through another banking crisis – along with capital controls , currency confiscation and bail-ins …..

    I wonder how much Joe public will take ?

    I’ve always posit’ed that MIRP/BIRP on main street savings & current accounts will do the trick !

    ( the sleeping will rise …. )


    PS: have some popcorn and watch the show ….. btw did Japan’s GNP increase ?

    • The activities of the the banks would be called gambling by most people except that the bankers play heads we win, tails you loose. Only when bonuses and salaries, paid out for performance, are clawed back when these deals and loans later fail will we see accountability and rather more thought given to the gambling in the first place.

  3. Hi Shaun

    Let’s face it: if credit growth exceeds income growth as it has for many years the banks are bound to end up as what you would call “zombies”; it is quite inevitable.

    The vast majority of bank lending is now on either private or commercial real estate the prices of which are bid up on the back of easy credit given on the basis of increasingly contingent incomes. In the absence of effective regulation this is almost bound to end badly.

    The vast derivatives market which are ones of pure speculation simply compound the potential problems on an exponential scale and turn the banks into parasites which are simply “skimming off the top” as the Mafia are supposed to do in casinos. You often discuss GDP in your blog and I’m sure you’re aware that there are those that do not regard banking as making a positive contribution at all to the economy and suggest that banking income should be deducted rather than added to GDP (Dmitry Orlov).

    Most banks are “zombies” and, until regulated properly will always be heading towards “zombiedom” as a matter of course.

    • Hi Bob J

      The contribution of banking to the economy was highlighted elsewhere today as the services export numbers show that financial services are the biggest for the UK. As I have written before we need to get a much better grip on the services position and I recommended this to the Bean Review of UK economic statistics.

      Commercial banks morphed into investment banks and now the genie is out of the bottle they have forgotten how to be commercial banks again.

  4. Hello Shaun ,

    The Glass-Steagall Act, also known as the Banking Act of 1933 (48 Stat. 162), was passed by Congress in 1933 and prohibits commercial banks from engaging in the investment business. It was enacted as an emergency response to the failure of nearly 5,000 banks during the Great Depression.

    We need it back but I know it wont happen because the Banks and their chums in the main parties will be toast …..

    Thus the game goes on……

    As you know I regard GDP/GNP as fantasy footbal and that the real issue issue balance of payment for which the UK also has an “accounting” problem ….. As for Japan , they make money , lets not poo poo that 🙂


    PS: I wonder if G.S. was enforced now if more than 5000 banks would be bust …..

    • Hi Forbin

      I can answer part of your previous question in that Gross National Income rose by 0.1% in Q4 of 2015. It should be along the lines of GNP but in practice it varies. Odd that they calculate GNI as Japan uses the expenditure series, no wonder they have trouble I guess!

      As to bank reform it seems we need their permission which is quite a blocking ball…

  5. UK played regulatory arbitrage under Brown. Now banking has captured the economy and they have the Treasury over a barrel. Coup complete.

    Kids: emigrate.

  6. Hi Shaun
    Of course the way the ECB is ‘buying’ bad debt from Italy is deceitful, with the usual dicing and slicing methodology encouraged by the ‘credit’ agencies taking their slice.
    However there is some merit in the problem going back to Germany to pay. If it decreased its consumption taxes and income taxes on low and middle paid employees sufficiently to create a national deficit, the ensuing unwinding of the euro investment inbalance would go a long way to solving the ‘med group’s’ problems.

    • Hi JW

      Mario Draghi was hinting about this in his statement this afternoon. From Reuters.

      “”The ABS will have to have a minimum second-best rating of single A. Therefore, the inclusion of NPLs in the pool of underlying assets does not preclude these ABSs … from collateral eligibility.””

      So everything will now be grade A?

      Germany may be willing to compromise on the banks now that its own issues are more public but otherwise it seems stuck. Maybe the migrant promises of Chancellor Merkel were on the stimulus road but they now seem to have hit trouble.

  7. Hi Shaun,

    Excellent article.

    From a politicians point of view, Zombie banks are better than bankrupt banks that need bailing out, so this problem is not going to go away in a hurry. If the sector weakens further, we can expect an acceleration in negative interest rates to then be recycled back to the banks in the form of bailouts! The negative interest rate costs will of course be passed on to us through our savings, except for those nasty tax evaders who keep their savings as cash under their mattress in high denomination notes!

    They’ve tried and failed with QE and inflation to steal our savings now it is negative interest rates turn!

    • Hi Rods and thank you

      The issue of high value banknotes also got an airing today. From Bloomberg.

      “The European Central Bank is examining ditching the 500-euro note, its president said on Monday, describing the note used by savers to hoard tens of billions of euros as an instrument also used by criminals.

      Mario Draghi said savers would not be penalized and could use the 200 euro note instead to hold their cash.”

      Not everyone at the ECB is as convinced though. From Bloomberg.

      In discussions with European law-enforcement officials, “it was always the same,” Mersch said. “We said: These are assertions. We would like to have them confirmed by evidence so that we could take the appropriate action.”

      Mind you as I think about it much of what they do has no evidence 😦

  8. Re Deutsche Bank – see page 231`”The Big Short” “When an executive said his Bank had plenty of liquidity it always meant that it didn’t”
    Re Italian Banks – if ECB is buying subprime Itainian loans who is selling them the CDSs

  9. Hi Shaun. Great stuff. As someone once said – when all other possibilities have been eliminated then what is left must be the truth. Pretty soon there will only be one possible explanation for ZIRP, NIRP, QE and dismal economic performance.

    This time it is different. The economic slump was not a result of the boom and bust cycle. It was, as well we all know, a result of the near collapse of the banking system. Unrepayble debt was the trigger and BNP were the first to notice in August 2007. Banking is in Chapter 11 in all but name.

    Wasn’t the Nikkei225 as high as 40,000 at one point?

    Apologies for playing old records – but we can’t let the b…….s off the hook.

    • Hi Eric

      Just shy of 39,000 in late 1989 was the Nikkei 225 peak I think. The only way is up had not been released then but that was the mainstream view. Reality was very different. Gives the 16k of now some perspective doesn’t it?

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