An Update on Emerging Issues in Banking 

How Real is the Threat of Deflation to the Banking 

Industry?

February 27, 2003 

Overview

The recession that began in March 2001 has had a generally benign effect on the 

banking industry, which remains highly profitable and well capitalized. The current 

financial strength of the industry is an important buffer against the effects of 

economic shocks. Nevertheless, the Federal Deposit Insurance Corporation 

(FDIC) routinely considers a number of economic scenarios that could develop 

over the next several quarters to evaluate factors that could result in the erosion 

in the financial health of individual banks or the industry. One such scenario that 

could present a major challenge to the banking industry involves deflation. This 

paper outlines the current debate over deflation, focusing on its potential effect on 

the banking industry. 

What is Deflation and How Does It Affect the Economy? 

Deflation refers to a decline in the general price level, usually caused by a sharp 

decline in money or credit supply or a severe contraction in the economy.1

Although sometimes used interchangeably, deflation differs from disinflation -- a 

falling rate of inflation. Although there have been sector-specific downward price 

adjustments, the U.S. economy has not experienced an outright decline in the 

aggregate price level since World War II, except for a brief and mild deflation in 

1949.2 However, the inflation rate in the U.S. has fallen steadily since the early 

1980s.

In order to fully understand the effect of deflation on economic output, it is 

important to differentiate the concept of a "real" value from a "nominal" value. A 

nominal value refers to a value of wages, incomes or interest rates in current 

prices. An increase in a nominal value over time partly reflects the rate of inflation. 

In comparison, a real value holds the actual purchasing power constant over time. 

Since wages are set in nominal terms, deflation would raise real wages if 

businesses found it difficult to reduce nominal wages.3 This would lead to lower 

profits, higher unemployment and deterioration in overall economic conditions. On 

the other hand, if businesses were able to reduce nominal wages, households 

would see incomes decline, leaving fewer financial resources to repay existing 

debts that are set in nominal terms. From the business side, as deflation reduces 

the price of goods sold, businesses would experience a profit squeeze and might 

be forced to trim payrolls. 

Under normal circumstances, nominal interest rates tend to fluctuate up or down 

in response to expectations about future inflation.4 Usually, a decline in expected 

inflation will lead to a decline in the nominal interest rate. However, once the 

nominal interest rate falls close to zero percent, a further decline in the expected 

inflation will cause the real interest rate to rise because the nominal interest rate 

has no room to fall further. Similar to the case of rising real wages, rising real 
interest rates tend to depress economic activity by increasing the real cost of 

capital and discouraging borrowing among consumers and businesses. 

Another way that deflation could depress economic activity and impair bank 

earnings is through "debt deflation". Deflation increases the real value of debt 

while decreasing the value of collateral for loans. The resulting deterioration in the 

corporate and household balance sheets, combined with a higher real interest 

rate, tends to weaken loan demand and could lead to a sharp increase in loan 

losses. As a result, deflation would have significant adverse effects on the 

banking industry, depending on its severity and duration. 

What Were Previous Episodes of Deflation?

In spite of potential damage deflation can bring upon the economy, not all 

deflation is harmful. For instance, China has experienced a steady decline in 

prices but also robust economic growth over the past five years.5 But a number of 

deflationary episodes of the past coincided with prolonged recessions and 

banking crises, although there is no clear consensus among economists about a 

causal relationship between these events.6 Examples of devastating deflationary 

experiences include a deflationary spiral during the Great Depression in the U.S. 

and a milder, but still damaging, deflation in Japan during the 1990s and early 

2000s. 

There is little question that a period of prolonged deflation would create severe 

consequences for the U.S. economy. During the Great Depression, between 

1929 and 1933, the price level as measured by the GDP deflator fell by 22.5 

percent.7 During the same period, U.S. gross national product (GNP) fell by 

nearly 33 percent, while nominal wages and salaries fell by about 45 percent. 

More than 5,000 banks were closed for financial difficulties over the four-year 

period starting in 1929.8

Recent experience in Japan has proven that even gradual and prolonged 

deflation can have a debilitating effect on the economy and the banking sector. 

Between 1995 and 2001, the Japanese GDP deflator fell by 5.3 percent.9 The real 

estate and stock prices have fallen further, which, in turn, has led to significant 

deterioration in the financial condition of Japanese banks. According to the 

Japanese Financial Services Agency, losses from nonperforming loan disposal 

for 13 major Japanese banks in fiscal year 2001 totaled 7.7 trillion yen 

(approximately $65 billion), up nearly 80 percent from the previous year.10

How Vulnerable Is the U.S. to Deflation?

The inflation rate in the U.S. has been low and falling throughout the 1990s. 

Factors contributing to continued disinflation include global competition in many 

markets, robust gains in productivity, and a long-term monetary policy regime that 

has reduced inflationary expectations. The annual rate of price appreciation for 

the economy averaged about 2.1 percent in the 1990s compared with 7.0 percent 

and 4.3 percent, respectively, in the 1970s and the 1980s. Inflation rates were 

also less variable on a year-to-year basis in the 1990s compared to previous 

decades (see Chart 1). As was the case in the Japanese economy in the 1980s, 

this low and stable inflationary environment contributed to stable output growth in 

the U.S throughout most of the decade.11
D

As U.S. inflation rates fell further during the recession that began in March 2001, 

some economists raised concerns about vulnerability of the U.S. economy to 

deflation. The GDP deflator increased by 1.1 percent in 2002, the smallest rise in 

this broad measure of inflation since 1961. Whether the current disinflationary 

trend is a precursor to outright deflation remains to be seen. In fact, not all prices 

for goods and services in the U.S. have experienced deflationary pressure. Some 

argue that the recent trend in aggregate prices is primarily driven by a decline in 

the price of goods and should not be viewed as the economy-wide trend. After 

declining through most of the year, consumer prices for commodities were up 0.8 

percent in the fourth quarter of 2002 from the same quarter a year earlier, 

primarily due to a spike in energy prices (see Chart 2).12 Consumer prices for 

durable goods continue to slide and they were down nearly 2.9 percent in the 

fourth quarter from the same quarter a year earlier. However, deflationary 

pressure on prices for nondurable goods may be easing somewhat. After falling 

five consecutive quarters, prices for nondurable goods, excluding foods and 

beverages, were up 3.4 percent in the fourth quarter. 
D

In comparison, year-over-year increases in consumer prices for services 

averaged above 3 percent throughout 2002.13 In particular, prices for medical care 

and education rose by 5.0 percent and 6.5 percent, respectively, in December 

2002 from a year earlier. The service sector has gained increasing importance in 

the U.S. economy over the past several decades, and now accounts for about 82 

percent of total nonfarm employment. In addition, spending on services 

represents nearly 60 percent of all consumer spending. As a result, continuing 

service sector inflation may help the U.S. economy avoid general deflation. 

While consumer price inflation seems to have stabilized somewhat in the second 

half of 2002, businesses continue to experience deflationary pressure on their 

output prices. The nonfarm business sector price deflator, a broad measure of 

output prices, increased by 0.1 percent in the third quarter of 2002 and 0.7 

percent in the fourth quarter from year-ago levels (Chart 3). Output prices for the 

manufacturing sector showed more solid gains in the fourth quarter. Between the 

fourth quarter of 2001 and the fourth quarter of 2002, the producer price index for 

the manufacturing sector rose by 1.6 percent. But several industries, including 

textile, electrical and electronic equipment and transportation equipment, continue 

to experience significant deflationary pressure. The deflationary trend in output 

prices may partly explain weak corporate earnings and employment in the past 

few quarters. 
D

What Can Be Done?

Concerns about possible deflation in the U.S. are not new. In late 1997 and early 

1998, many analysts expressed concerns about deflationary pressures resulting 

from the Asian currency crisis that helped drive the U.S. inflation rate to a 24-year 

low.14 In fact, the consumer price inflation rate remained below two percent for six 

quarters starting in the fourth quarter of 1997. Several factors differentiate the 

current environment from that of the post-Asian crisis, and make deflationary 

concerns somewhat more relevant. First, unlike in 1998 when the economy was 

expanding rapidly, the U.S. economy is currently growing below its potential. 

Second, the U.S. economy has experienced large scale declines in major equity 

price indices since mid-2000, with concurrent excess capacity in certain 

industries. Finally, in response to weak economic conditions, the federal funds 

rate target has fallen to a 40-year low of 1.25 percent, limiting interest rate policy 

options.

Economists believe that the U.S. will not experience the emergence of a 

deflationary spiral involving a significant decline in the price level.15 One important 

reason for this is that a key defense against deflation is an aggressive easing of 

monetary policy. The Federal Reserve lowered interest rates a record 11 times in 

2001 by a total of 450 basis points, and then added another 50 basis point 

reduction in the federal funds rate in November 2002. However, according to 

Federal Reserve research, as the inflation target falls below two percent and 

moves towards zero percent, severe contractions, which could lead to deflation, 

become more likely.16 Moreover, as the federal funds rate approaches zero ("zero 

nominal bound"), the Federal Reserves ability to use monetary policy to stimulate 

the economy becomes more limited. Most non-traditional monetary policy options 

that have been suggested are untested and, as a result, it is difficult to predict the 
effectiveness of such policies.17

In addition, recent Japanese experience has shown that deflation is difficult to 

predict. Neither policymakers nor financial market participants seemed to have 

anticipated deflation in Japan.18 Historical experience shows that once deflation 

takes hold, the cost of deflation to the economy can be potentially very large. As a 

result, many economists have recently advocated even more aggressive 

monetary easing in order to prevent deflation in the U.S.19 Others have called for 

aggressive fiscal policies to stimulate the economy as room for further interest 

rate reductions has diminished.20 In spite of the low probability of deflation, many 

economists believe that aggressive preemptive policies involving both monetary 

and fiscal authorities may be warranted in order to boost domestic demand and 

prevent deflation.

Is Deflation a Concern for the U.S. Banking Industry?

Depending on its structure and financial strength, the banking system plays an 

important role in either helping to avert or bring about deflation. Historical 

experience shows that banking systems that withstood the threat of deflation 

shared a few common characteristics. For instance, in comparing banking 

experience across countries during the Great Depression, Bernanke and James 

(1990) observed several structural differences between banking systems of 

countries that experienced a serious banking crisis and those that did not. The 

banking systems with greater diversification, limited equity participation, little 

short-term foreign deposits, strong balance sheet positions, or a previous history 

of fundamental reforms appeared to have weathered global deflation in the early 

1930s better than others. 

Based on these observations, U.S. banks would probably be able to withstand 

deflationary shocks better than Japanese banks. In light of recent U.S. banking 

history, various developments in the U.S. banking industry over the past decade 

likely have reduced its vulnerability to deflationary shocks. For instance, the U.S. 

banking industry has gone through significant geographic and product 

diversification over the past decade. This has helped the industry to better 

smooth out earnings throughout the national and regional business cycle. In 

addition, unlike Japanese banks, U.S. banks hold few corporate equities, limiting 

the industrys vulnerability to equity price declines. 

Since the early 1990s, U.S. banks have been, in general, highly profitable and 

well capitalized. The return on average assets for FDIC-insured depository 

institutions reached 1.34 percent as of September 2002 while the equity ratio rose 

to 9.2 percent of total assets. By comparison, Japanese banks were significantly 

less profitable and less well-capitalized before the collapse of asset bubbles and 

subsequent deflationary recession. For example, at the end of fiscal 1989, the 

return on assets for Japanese banks was only 0.2 percent while the equity ratio 

was 3.0 percent.21 Once asset prices collapsed, large direct corporate equity 

holdings and high exposures to real estate led to severely impaired earnings for 

Japanese banks. Deflation that began in the mid-1990s further contributed to 

these losses (see Chart 4). The reluctance of Japanese banks to recognize and 

dispose of nonperforming loans in turn imposed additional costs to carry them at 

book value, further depressing bank earnings.22
D

U.S. banks would likely experience significant earnings pressure with deflation if it 

resulted in weak loan demand and rising loan losses. In particular, banks with 

relatively weak capital positions, low profitability or borrowers with a higher risk 

profile may face significant difficulties if deflation took hold and unexpected loan 

losses mounted. However, the ability of borrowers to refinance obligations at 

lower rates could somewhat soften the adverse effect of debt deflation on bank 

borrowers and the banking industry. New risk management tools such as credit 

derivatives may also help banks maintain their balance sheet strength even if a 

deflationary scenario were to develop.23 In addition, the current financial strength 

of most U.S. banks likely provides a buffer against a potential surge in loan losses 

resulting from deflation. 

Conclusion

Although deflation remains a remote possibility in the U.S., its potential high 

economic costs warrant continued discussion and research of the issue, as well 

as vigilance on the part of policymakers. A deflationary scenario is of particular 

concern to the banking industry. If a deflationary scenario were to develop, it 

could depress loan demand, impair the ability of borrowers to repay loans, and 

sharply reduce bank earnings. Past episodes of asset and goods price deflation 

has often coincided with banking crisesparticularly when it occurred where banks 

were already in weak financial condition. However, the resilience and flexibility of 

the U.S. economy and financial markets, combined with proactive monetary and 

fiscal policy responses to weakening demand, appear to have greatly reduced the 

likelihood of this scenario for the foreseeable future. 

1 In the case of the Great Depression, some economists believe that the interwar 
gold standard system triggered global deflation. See Ben Bernanke and Harold 

James, "The Gold Standard, Deflation, and Financial Crisis in the Great 

Depression: An International Approach," NBER Working Paper 3488, October 

1990. 

2 Deflation during 1949 likely reflects a post-war adjustment in the output and 

prices. Both GDP growth and the GDP deflator inflation rate showed high volatility 

during this period.

3 Evidence on the existence of "nominal wage stickiness" is somewhat mixed. 

See Charles T. Carlstrom and Timothy S. Fuerst, "Perils of Price Deflations: An 

Analysis of the Great Depression," Federal Reserve Bank of Cleveland Economic 

Commentary, February 15, 2001 and Ben Bernanke and Harold James, October 

1990. 

4 This is a famous Fisher equation, which equates nominal interest rate to real 

interest rate plus the rate of expected inflation. Between 1960 and the third 

quarter of 2002, the correlation between the GDP deflator inflation rate and the 

nominal interest rate was about 72 percent.

5 Bruce Kasman and Robert Mellman, "Distinguishing Deflation from a 

Deflationary Trap", JPMorgan Chase Economic Research Note, October 4, 2002.

6 Ben Bernanke and Harold James, October 1990 and Barry Eichengreen and 

Richard Grossman, "Debt Deflation and Financial Instability," University of 

California at Berkeley Economics Working Paper 94-231, June 1994. In the 

recent Japanese experience, deflation followed a collapse of equity and real 

estate price bubbles, recession, and a banking crisis. In turn, deflation appears to 

have exacerbated economic deterioration already underway.

7 Data from Harold L. Cole and Lee E. Ohanian, "Re-Examining the Contributions 

of Money and Banking Shocks to the U.S. Great Depression," NBER 

Macroeconomics Annual 2000, edited by Ben Bernanke and Julio Rotemberg, 

Cambridge, MA.: MIT Press, 2001.

8 Data from NBER Macrohistory database.

9 Data from Economic and Social Research Institute, Cabinet Office, Government 

of Japan.

10 The Japanese fiscal year ends in March. The dollar figure is based on the 

average dollar-yen exchange rate in January 2003.

11 John B. Taylor, "Low Inflation, Deflation, and Policies for Future Price Stability," 

Prepared for the Ninth International Conference, "The Role of Monetary Policy 

under Low Inflation: Deflationary Shocks and Their Policy Responses," sponsored 

by the Institute for Monetary and Economic Studies, Bank of Japan, July 3-4, 

2000.

12 Commodity prices excluding food and energy commodities remain depressed 

and they were down 1.5 percent in December 2002 from a year earlier.

13 One of the possible factors behind the disparity in the inflation rates for goods 
and services is the difference in labor productivity. Official figures show significant 

productivity gains in the goods-producing sector while labor productivity has 

declined steadily in the service sector. However, these figures may be somewhat 

misleading because of difficulties associated with measuring service sector 

productivity. 

14 J. Bradford DeLong, "Why We Should Fear Deflation," Post-meeting draft for 

the Brookings Panel on Economic Activity, March 25-26, 1999. DeLong states 

that over the six-month period in late 1997 and early 1998, 438 newspaper 

articles were classified under the keyword "deflation." Also see Paul Bishop, "How 

Will the Expansion End?" FDIC Regional Outlook, Second Quarter 1998.

15 John Taylor, July 3, 2002, posits that it may require about 2.5 percent annual 

deflation to trigger the deflationary spiral. Using this definition, even the Japanese 

economy is not currently experiencing a deflationary spiral.

16 David Reifschneider and John C. Williams, "Three Lessons for Monetary Policy 

in a Low Inflation Era," Federal Reserve Board Finance and Economics 

Discussion Series, September 1999.

17 For further discussion on monetary policy options, see James Clouse, et al., 

"Monetary Policy When the Nominal Short-term Interest Rate is Zero," Federal 

Reserve Board Finance and Economics Discussion Series, November 27, 2000.

18 Alan Ahearne, et.al, "Preventing Deflation: Lessons from Japan's Experience in 

the 1990s," Federal Reserve Board International Finance Discussion Papers, 

June 2002.

19 Ibid; Reifschneider and Williams, September 1999; Athanasios Orphanides and 

Volker Wieland, "Efficient Monetary Policy Design Near Price Stability," Federal 

Reserve Board Finance and Economics Discussion Series, December 1999. 

20 For a discussion of the role of fiscal policy in a low interest rate environment, 

see Martin Feldstein, "The Role for Discretionary Fiscal Policy in a Low Interest 

Rate Environment," National Bureau of Economic Research Working Paper, 

September 2002. However, some economists have questioned the role of fiscal 

policy in preventing deflation. See Marvin Goodfriend, , "Financial Stability, 

Deflation, and Monetary Policy," Federal Reserve Bank of Richmond Working 

Paper, January 2001. 

21 Calculated by the author based on the data from the Bank of Japan. Financial 

statements of Japanese banks can be downloaded from 

http://www.boj.or.jp/en/stat/stat_f.htm. The equity-to-assets ratio may not be 

strictly comparable between the U.S. and Japanese banking systems due to 

differences in the way equity capital is calculated and the existence of hidden 

reserves in the value of stock ownership among banks and nonbank companies.

22 Thomas F. Cargill, Michael M. Hutchison and Takatoshi Ito, "Asset-Price 

Deflation: Nonperforming Loans, Jusen Companies, and Regulatory Inertia," The 

Political Economy of Japanese Monetary Policy, The MIT Press: Cambridge 

Massachusetts, 1997.

23 Charles T. Carlstrom and Timothy S. Fuerst, February 15, 2001. 
About FYI

FYI is an electronic bulletin summarizing current information about the trends that 

are driving change in the banking industry, plus links to the wide array of other 

FDIC publications and data tools. 

Disclaimer 

The views expressed in FYI are those of the authors and do not necessarily reflect 

official positions of the Federal Deposit Insurance Corporation. Some of the 

information used in the preparation of this publication was obtained from publicly 

available sources that are considered reliable. However, the use of this 

information does not constitute an endorsement of its accuracy by the Federal 

Deposit Insurance Corporation. 

Last Updated 3/01/2004

Chart 1

The U.S. Economy Enjoyed a Lower and More Stable

Inflationary Environment in the 1990s 

Average and Standard Deviation of Annual 

Inflation Rates

(GDP Deflator-Based)

Date Average 

Inflation Rate Volatility 

1950s 2.45% 1.9%

1960s 2.75% 1.6%

1970s 6.99% 1.9%

1980s 4.27% 2.1%

1990s 2.14% 0.7%

Source: Bureau of Economic Analysis

Chart 2

Consumer Commodity Prices Have Experienced 

Significant Deflationary Pressure While Prices For 

Services Continue To Rise 

Year-Over-Year Changes in the Consumer Price Index 

Date Commodity Prices of
Prices Services 

1989:Q1 4.53% 4.83%

1989:Q2 5.54% 4.97%

1989:Q3 4.33% 5.04%

1989:Q4 4.27% 4.98%

1990:Q1 5.27% 5.12%

1990:Q2 3.65% 5.32%

1990:Q3 5.18% 5.80%

1990:Q4 6.72% 5.86%

1991:Q1 4.39% 6.03%

1991:Q2 4.26% 5.34%

1991:Q3 2.89% 4.68%

1991:Q4 1.16% 4.50%

1992:Q1 1.56% 3.95%

1992:Q2 1.82% 4.06%

1992:Q3 2.21% 3.79%

1992:Q4 2.22% 3.81%

1993:Q1 2.42% 3.78%

1993:Q2 2.15% 3.94%

1993:Q3 1.39% 3.93%

1993:Q4 1.53% 3.70%

1994:Q1 1.09% 3.71%

1994:Q2 1.19% 3.31%

1994:Q3 2.38% 3.22%

1994:Q4 2.07% 3.11%

1995:Q1 2.37% 3.18%

1995:Q2 2.56% 3.47%

1995:Q3 1.64% 3.44%

1995:Q4 1.53% 3.48%

1996:Q1 2.19% 3.26%

1996:Q2 2.42% 3.11%

1996:Q3 2.36% 3.31%

1996:Q4 3.04% 3.30%

1997:Q1 2.45% 3.30%

1997:Q2 1.29% 3.13%

1997:Q3 1.33% 2.92%

1997:Q4 0.59% 2.87%

1998:Q1 -0.09% 2.70%

1998:Q2 0.07% 2.74%

1998:Q3 0.14% 2.61%

1998:Q4 0.14% 2.59%
1999:Q1 0.59% 2.50%

1999:Q2 1.62% 2.43%

1999:Q3 2.11% 2.49%

1999:Q4 2.69% 2.56%

2000:Q1 3.69% 2.94%

2000:Q2 3.45% 3.21%

2000:Q3 3.22% 3.70%

2000:Q4 2.83% 3.90%

2001:Q1 1.94% 4.43%

2001:Q2 1.93% 4.43%

2001:Q3 0.78% 4.08%

2001:Q4 -0.71% 3.67%

2002:Q1 -1.37% 3.12%

2002:Q2 -1.19% 3.09%

2002:Q3 -0.57% 3.12%

2002:Q4 0.74% 3.34%

Source: Bureau of Labor Statistics

Chart 3

U.S. Businesses Have Experienced Significant 

Deflationary Pressure On Output Prices 

Since Late 2001 

Year-Over-Year Change in Price Deflators

Date

Nonfarm 

Business

Deflator 

Core Personal 

Consumption

Expenditure (PCE) 

Deflator* 

1989:Q2 3.9 4.21%

1989:Q3 3.6 3.84%

1989:Q4 3.4 3.88%

1990:Q1 3.4 3.80%

1990:Q2 3.4 4.25%

1990:Q3 3.7 4.63%

1990:Q4 4.1 4.50%

1991:Q1 4.3 4.62%

1991:Q2 3.8 4.17%

1991:Q3 3.6 3.94%

1991:Q4 3 3.92%

1992:Q1 2.4 3.94%

1992:Q2 2.2 3.83%

1992:Q3 1.7 3.44%
1992:Q4 2 3.29%

1993:Q1 2.1 2.79%

1993:Q2 2.2 2.73%

1993:Q3 2.3 2.66%

1993:Q4 2.1 2.40%

1994:Q1 1.7 2.12%

1994:Q2 1.7 2.05%

1994:Q3 2.1 2.38%

1994:Q4 2 2.26%

1995:Q1 2.3 2.59%

1995:Q2 2.2 2.53%

1995:Q3 1.7 2.28%

1995:Q4 1.5 2.27%

1996:Q1 1.3 2.04%

1996:Q2 1.2 1.87%

1996:Q3 1.3 1.74%

1996:Q4 1.7 1.83%

1997:Q1 2 1.97%

1997:Q2 2.2 2.11%

1997:Q3 2.2 1.98%

1997:Q4 1.9 1.73%

1998:Q1 1.3 1.54%

1998:Q2 0.8 1.39%

1998:Q3 0.8 1.52%

1998:Q4 0.7 1.57%

1999:Q1 0.9 1.50%

1999:Q2 1.1 1.45%

1999:Q3 1.2 1.42%

1999:Q4 1.4 1.48%

2000:Q1 1.7 1.71%

2000:Q2 1.8 1.80%

2000:Q3 1.8 1.76%

2000:Q4 1.9 1.79%

2001:Q1 2.1 1.94%

2001:Q2 2.1 1.78%

2001:Q3 2.2 1.65%

2001:Q4 1.5 1.88%

2002:Q1 0.6 1.52%

2002:Q2 0.5 1.70%

2002:Q3 0.1 1.96%

2002:Q4 0.7 1.65%
* The core PCE deflator excludes prices for food and energy components. 

Source: Bureau of Economic Analysis and Bureau of Labor Statistics

Chart 4

As Japanese Banks Have Experienced Earnings 

Difficulties, U.S. Banks Have Remained Highly Profitable 

Return on Assets 

Date 

FDIC-Insured 

Depository 

Institutions 

All

Japanese

Banks 

1989 0.2% 0.2%

1990 0.2% 0.2%

1991 0.4% 0.2%

1992 0.9% 0.1%

1993 1.1% 0.1%

1994 1.0% 0.0%

1995 1.1% -0.5%

1996 1.1% 0.0%

1997 1.1% -0.5%

1998 1.1% -0.6%

1999 1.2% 0.1%

2000 1.1% 0.0%

2001 1.1% -0.7%

* Return on asset figures for Japanese banks are as of the end of the fiscal year, which ends in 

March. 

Source: FDIC Research Information System and Bank of Japan

Chart 4

As Japanese Banks Have Experienced Earnings 

Difficulties, U.S. Banks Have Remained Highly Profitable 

Return on Assets 

Date 

FDIC-Insured 

Depository 

Institutions 

All

Japanese

Banks 

1989 0.2% 0.2%

1990 0.2% 0.2%

1991 0.4% 0.2%
1992 0.9% 0.1%

1993 1.1% 0.1%

1994 1.0% 0.0%

1995 1.1% -0.5%

1996 1.1% 0.0%

1997 1.1% -0.5%

1998 1.1% -0.6%

1999 1.2% 0.1%

2000 1.1% 0.0%

2001 1.1% -0.7%

* Return on asset figures for Japanese banks are as of the end of the fiscal year, which ends in 

March. 

Source: FDIC Research Information System and Bank of Japan