Parallels abound between Europe’s current debt crisis and Japan’s so-called Lost Decade, when the Asian country’s economy imploded in the 1990s.
Both regions experienced real estate booms ahead of their financial crises, consumers took on large levels of debt and domestic banks built up unsustainable loan-to-deposit ratios as they sought to feed local demand for borrowing.
Recently, analysts at Barclays examined whether Europe’s debt crisis would affect local banks the same way that Japan’s economic downturn hurt that country’s financial institutions.
Their conclusions are not happy reading for European banks, which are trying to pare back lending, increase capital reserves and reduce risky trading activity in investment banking units.
Many of the Continent’s largest financial institutions have recently reported weak first-quarter earnings. Last week, Deutsche Bank of Germany announced a 34 percent drop in net profit, to $1.85 billion, while the Swiss banking giant UBS said on Wednesday that income for the first three months of the year fell 54 percent, to $911 million.
For the Barclays analysts, more pain may be on its way. In both Europe and Japan, the stock performances of local banks during each region’s crisis have been remarkably similar.
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