If you catch a cold, do you eat less and work more?

December 21, 2020
by Noriyuki Morimoto

The key to treating a cold is to treat it early. Take a rest and eat nutritious food so it doesn’t get worse. By contrast, if you catch a cold and decide to work harder and skip meals, it will get worse and may develop into a serious illness like pneumonia, which can be fatal.

Corporate performance cannot avoid fluctuations of various degrees, so slumps similar to a common cold can always happen. Based on financial theory, credit risk increases as business conditions deteriorate, so interest rates must be raised and total credit volume must be reduced. This is like being told to work harder and skip meals when you catch a cold. But doing so will inevitably worsen business conditions, and a cold that may have naturally healed can develop into pneumonia or even more serious illnesses.

This is a serious dilemma in finance. The Financial Services Agency demands banks to rigorously assess the credit risk of their borrowers. Therefore, raising interest rates and collecting loans in response to worsening credit risk is the right thing to do as a bank. But this right thing, ironically, goes against the bank’s social mission to provide businesses with the money they need, when they need it.

Therefore, as an advanced request, the FSA has asked banks not only to examine the details of worsened business conditions, but whenever it is determined to be something like a cold without serious risk of further deterioration, to offer more meals and allow for rest, that is, to provide financial support such as lowering interest rates.

This is a very high demand. Are banks capable of determining whether the worsening performance of the borrower is a cold that will soon heal, or a cold that can lead to pneumonia, or something that can even lead to a life-threatening situation?

Moreover, if financial support is provided at the stage of a cold, but pneumonia develops anyway, the bank will have no choice but to provide thorough support even beyond the financial framework. In fact, the FSA’s demands seem to have advanced to that stage.


[Category /Industrial Finance]

Noriyuki Morimoto
Noriyuki Morimoto

Chief Executive Officer, HC Asset Management Co.,Ltd. Noriyuki Morimoto founded HC Asset Management in November 2002. As a pioneer investment consultant in Japan, he established the investment consulting business of Watson Wyatt K.K. (now Willis Towers Watson) in 1990.