If a bank takes that approach

Here is an idea so absolutely idiotic that it is hard to believe our government didn’t implement it first. It is from the Japanese, perhaps reflecting the creative thinking responsible for their outstanding economic results of the past two decades. Apparently, if a bank customer is a deadbeat, the bank will not have to classify the loan as non-performing or set up loss reserves against it. Now that is a strategy that should produce stronger banks.
Japanese banks’ bad loans won’t be driven higher by a proposed moratorium on debt payments by struggling small companies, said Financial Services Minister Shizuka Kamei.
Lenders won’t have to classify loans encompassed by the plan as non-performing, Kamei, 72, said in an interview yesterday at his office in Tokyo. That means they won’t be forced to boost provisions when borrowers postpone repayments of interest or principal, he said. At the same time, Kamei vowed to push banks to extend more credit to small businesses after bankruptcies hit a six-year high in Japan.
“We’re going to get financial institutions to provide these firms with more loans,” said Kamei. “Banks won’t have to treat debt on which they provide a moratorium as bad.”
The moratorium, postponing repayment of principal and interest, will be extended to individuals as well as firms Kamei said. It will aim at giving relief to companies with about 100 million yen ($1.1 million) or less in capital.
“As long as I’m financial services minister, I’m not going to leave small companies in the lurch unable to get loans,” Kamei said. “If a bank takes that approach, I’ll hit them with a business improvement order.”
The full article by Mish can be read by clicking on his name.
This may be one of the most asinine economic policies ever implemented, very high praise indeed given all the competition. A third-grader should be able to spot the fallacies in such policy. Weak banks will be made even weaker. Strong banks presumably would be able to stop pouring good money after bad and recognize the loss (although I have no idea how much being hit with “a business improvement order” hurts). Even more damaging will be the unintended consequences. The law effectively coerces banks to overturn contracts at the whim of the State. That has frightening implications for all business, not only banks. For banks, it dramatically raises the risks of lending money, ensuring that future loans will be more restrictive than they otherwise would have been.
The idea is so bad that we should expect to see it surface here. Oh yes, we have already heard it discussed in different variants — forced moratoriums and/or cramdowns on mortgages. Thus, our government has not lost its creativity, but appears to be a bit tardy on applying such ideas. Whether this tardiness reflects ineptness or the acquisition of a conscience should not be too difficult for the reader to figure out. On the other hand, perhaps our creativity is slipping. After all, cash for clunkers was not our idea. We copied others.