Megabanks, Megaprofits

Just a few years after having enormous amounts of money injected by the government, the Japanese megabanks are doing very well, it seems. Posting record profits even surpassing the figures achieved in the late 80’s bubble.

The largest financial group, the newly merged Mitsubishi UFJ Financial Group, is on track to post profits of more than 1.3 trillion yen, and surpassing even the profits of Toyota.

But how is this being achieved?

Interest on current accounts　is still at 0.001%p.a.

Even for a 5 year fixed term savings account with at least JPY3M (approx $25,000), interest is at 0.1%p.a.
However, if you were a small business trying to borrow money, the ads state interest rates starting at around 2.5~2.75%, but many small companies can’t even get approved for these loans which typically apply interest rates significantly higher than the advertised rate anyway, depending on credit rating.

Being shunned by banks, small businesses and individuals who need cash urgently turn to consumer credit companies, many of which have been snapped up by the big financial groups. Even if the bank refuses to lend you money, their affiliated consumer credit companies appear more than willing to lend them money, the only catch being interest rates in the teens.

With penalty clauses pushing real interest rates up to and beyond 25% in some cases, it would seem consumer credit companies are in the business of getting their customers to default on payments and milking them for all they’re worth. And these consumer credit companies are indeed making a tidy profit. Which adds to the parent bank’s profits in the consolidated group earnings report, of course.
The banks would claim that they needed to clamp down on corporate lending because they were burdened by bad loans and heavy losses on their stock portfolios. Consumer credit firms were more willing to take risks, and these firms grew quickly during the 90’s. The banks bought these firms seeing how profitable they were, and by colluding to deprive corporations of capital at reasonable interest rates, are driving the companies to borrow money at usurous rates.

The cost of capital for the banks is considerably lower than it was for the consumer loans firms when they were independent, yet the banks (via their consumer loans subsdiaries) keep on gouging profits out of businesses and consumers left with no where to go.
It could be argued that the tightening of the credit conditions is due to the banks, which by throwing money at businesses during the bubble and therefore were complicit in the reckless abandon which resulted in the bad loans in the first place, which are now overreacting to being burned in the past.

However, a more cynical observer might ask, “Why lend money at a reasonable interest rate which will allow your customer to pay off the loan, when you can charge them higher interest and keep milking them for longer….”

I don’t think it is unfair to state that the banks are defaulting on, or actually even exploiting the implicit social contract that existed when these firms were given their licenses.

There is no incentive for banks to revert to giving companies loans at more reasonable rates, unless an outsider takes the initiative, as the large domestic banks aren’t going to be the ones which challenge the status quo. If I had to guess who is likely to come up with a guess for which bank makes a splash, it would probably be Shinsei.