Under the Japanese model, losses on the excesses in the financial system are only recognized as banks generate the capital to absorb them. This is good for banks, particularly their book capital, because the model involves hiding their true condition and pursuing policies designed to boost bank earnings. It is bad for the economy because it distorts asset prices and access to capital (for proof, look at the performance of Japan's economy).
The alternative is a Swedish model that is bad for banks and good for the economy. It is bad for banks, particularly their book capital, because they are required to recognize the losses on the excesses in the financial system today. It is good for the economy because it avoids the distortion in asset prices and access to funding associated with hiding the losses under the Japanese model (for proof, look at the performance of Sweden's economy).
The following are a series of posts which examine these models and their implications:
Confirmation that Japanese Model being used and losses are being hidden
RBS's Stephen Hester's confession that bank hiding losses with regulators' blessing
Just how sizable are the losses being hidden by banks?
Choosing between Japanese and Swedish models
Its not to late to adopt the Swedish model and stop the financial crisis
Response to solvency crisis: Swedish vs Japanese model
Liam Halligan: EU policy choice is between Swedish and Japanese models
Europe's banks are addicted to ECB's money
Proof Swedish Model Works
Iceland confirms that Swedish model for bank solvency works
Toxic Side-Effects from Implementing Japanese Model
Repealing Disclosure Laws seems Reasonable
Greece is Heading for Hell
Background
Is there any truth to bank earning presentations under Japanese model?
Hiding losses does not restore confidence in banking system
The policy of 'what is good for banks is good for the economy' has failed
Do nations exist for capitalism or their citizens?
What interest rate would central bank policy be set at if the Swedish model had been used?
Controlling the fiscal costs of banking crisis
