Quick Take: More Dirty Laundry at Mitsubishi UFJ

Mitsubishi UFJ Financial Group (NYSE: MTU) has given investors another reason to be skeptical of Japanese banks. According to a report in the Kyodo News, Japan's Financial Services Agency has just slapped Mitsubishi UFJ with penalties that extend over a number of weeks (depending on region) and prohibit the bank from making new loans, after finding that Mitsubishi UFJ made loans that violated its own internal rules.

These particular loans went to Kunihiko Konishi and the foundation he once ran. To top it off, the loans weren't properly collateralized, Konishi was sentenced earlier this year to embezzlement from the foundation, and the loans are now considered unrecoverable.

Bad loans happen, but this case shows clearly that Japanese banks are still practicing more of a relationship-based lending approach than a risk-based one. This can work well when the economy is strong, but as we've seen in the past, it can be disastrous when the economy softens. With their sheer size, megabanks such as Mitsubishi UFJ, Sumitomo-Mitsui Financial Group, and Mizuho Financial Group (NYSE: MFG) will likely receive help from the government if they run into trouble, but they're unlikely to thrive, and it's proving difficult for investors to trust them.

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At the time of publication, Nathan Parmelee had no financial interest in any of the companies mentioned. He was ranked 73rd out of 22,692 CAPS investors. The Motley Fool has an ironclad disclosure policy.