For the benefit of Gaius Marius

 Gaius Marius of the (usually lower case) “decline and fall” blog left the following comment on my 77 Bank note.  

But American banks are not awash in funding – and given the profligacy (especially historic) of the American consumer – not to mention tax cut funded Iraq wars and the like – the US financial system is almost always going to be an importer of spondulicks. That might change in twenty five years – but it is not changing now.i think this is really the big question, isn't it? were not japanese banks in more or less exactly this position in 1991-2, but with corporate rather than consumer credits sucking up all available lending capacity? 

western banks are collecting fat spreads right now, but the true long-term test for the system won't be in loan supply -- it's in loan demand. if banks can't make sufficient new loans to replace the fat ones rolling off their books, earning power will diminish over time even as asset prices continue to deteriorate.

as i understand it, japan ended up with massive excess funds in banks because (beginning in 1996) the private sector started to repay loans (ie, aggregate loan demand went negative), to the tune during the early 2000s of 5% GDP. but in 1989, the japanese nonfinancial corporate sector was increasing its bank debt at a rate of in excess 12% of GDP (and issuing debt on the order of 5% GDP in capital markets to boot). that massive 17%-of-GDP swing in private credit took ten years to effect. aggregate private sector loan repayment seemed to have ended in 2005, but has probably resumed in this crisis.

to prevent a crash in monetary aggregates, the government borrowed out these excess deposits, which at 77 bank shows up as a massive investment portfolio in JGBs. 

for what it's worth, i think a more appropriate comparison would be to the 77 bank of 1991. i have a sneaking suspicion that 77 bank was then also a mirror image of the current 77 bank, but i'd love to be disabused of that notion.

 

The comment is reflected in several emails I have received.  It seems several people had the same idea - though maybe less well articulated than Gaius.

Well Gaius – you can be disproved of the notion.  I have uploaded a 20 year balance sheet for 77 Bank here.  It is here.  The loan to deposit ratio started at 74 percent and wound up at 64 percent – with the mix of the loans moving towards lower margin government loans over time. 

Japan was long funding when it went into its crisis.  The crisis was long, slow and with thin bank margins but very little “crisis” but a lot of sustained malaise.  The banks got longer funding as the malaise/liquidity trap went on.

Korea and Thailand were short funding when they went into the crisis – and the crisis was severe and relatively quick.  Banks failed rapidly (and were bailed out in both countries either through subsidy or nationalisation).

Note that relatively quick in this context is a depression level recession lasting a few years - rather than a sustained malaise lasting decades.

Still this difference has profound investing implications - and also some policy implications - and that makes it worth thinking about.