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Japan's Mizuho Bank System Failures: Black Swans Are Alive and Well, Unfortunately

Japan's Mizuho Financial Group has faced days of system failures in its retail banking operations. Problems started Monday night.

Now ATMs and Internet banking facilities have stopped working for Japan's second largest bank and today will likely bring disruption of $9.4 billion worth of payroll transactions -- on top of more than $7 billion in other disruptions earlier in the week. There have been no foreign exchange transactions since Tuesday.

The scary thing is that none of this is a direct consequence of the earthquake and tsunami that devastated large areas of the country. What we're seeing is the result of poor designs, inadequate assumptions, and oversights that could happen in any bank, or any other type of corporation, in the world.

Mizuho's not exactly adequate explanation
Mizuho claimed that an unusually large number of deposits at some Tokyo-area branches caused the problem. As of today, bank management still hasn't determined the source of the deposits (perhaps related to relief aid) and the exact nature of the failure.

But what is clear is that this corner of the global financial industry once again came upon a black swan event -- one of those once-in-a-century calamities that managers write off as practically impossible until they happen. Every industry has its perfect storm scenarios that happen every decade or two.

Most recently, we've seen these in the derivatives and mortgage crises. Looking back in finance alone, you could add the stock crash of 2007, the Asian financial crisis of 1997, and the savings and loan debacle of the 1980s. High tech had the dot com bubble about ten years ago and the Y2K panic at the end of the 1990s.

Guess what? You can see black swans in advance
What is interesting in each case is that executives should have been foreseen and avoided the problems. Are investments overly risky? Then diversify and focus on sound business practices. Betting that your company can survive on the promise of higher future stock prices alone and that business and economics have changed so much from the past that revenue isn't important? Get real.

Mizuho might not have been able to predict a pair of natural disasters that would batter the entire country of Japan. But it could have assumed that something unforeseen might one day put unexpected strain on branches, or cause more transaction processing than anyone thought was possible. Even if a company has what it thinks is sufficient computing capacity for peak business periods, it can, as a form of IT safety, create mechanisms to slow down or suspend operations should systems reach a dangerous threshold.

Clearly one of the major banks in the entire world didn't. Anyone really want to bet that it was the only one, or that, absent the combination of a tsunami and earthquake, such disruption is completely impossible? No, didn't think so.


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