A zombie bank is a
financial institution
Financial institutions, sometimes called banking institutions, are business entities that provide services as intermediaries for different types of financial monetary transactions. Broadly speaking, there are three major types of financial insti ...
that has an economic
net worth
Net worth is the value of all the non-financial and financial assets owned by an individual or institution minus the value of all its outstanding liabilities. Since financial assets minus outstanding liabilities equal net financial assets, net ...
less than zero but continues to operate because its ability to repay its debts is shored up by implicit or explicit government credit support. The term was first used by
Edward Kane
Edward J. Kane (born June 30, 1935) is an American economist and writer. He is a long-time student of incentive conflict in financial regulation and in crisis-management policies. He contends that too-big-to-fail policies are rooted in the cultura ...
in 1987 to explain the dangers of tolerating a large number of insolvent
savings and loan association
A savings and loan association (S&L), or thrift institution, is a financial institution that specializes in accepting savings deposits and making mortgage and other loans. The terms "S&L" or "thrift" are mainly used in the United States; simi ...
s and applied to the emerging
Japanese crisis in 1993.
A zombie can continue to operate and even to grow as long as creditors remain confident in the relevant government's ability to extract the funds needed to back up its promises from current or future taxpayers. But when this ability seems doubtful, zombie institutions face
runs by uninsured depositors and
margin call
''Margin Call'' is a 2011 American drama film written and directed by J. C. Chandor in his feature directorial debut. The principal story takes place over a 24-hour period at a large Wall Street investment bank during the initial stages of the ...
s from counterparties in
derivatives
The derivative of a function is the rate of change of the function's output relative to its input value.
Derivative may also refer to:
In mathematics and economics
* Brzozowski derivative in the theory of formal languages
* Formal derivative, an ...
transactions.
Etymology
In an article published in the Mar/Apr 1992 issue of ''Society'' entitled "The Savings and Loan Insurance Mess," Edward Kane expanded on the source of the analogy. "Although the Savings and Loan (S&L) debacle is extremely complex," Kane wrote, "simple-minded cartoons and horror movies can illustrate how the S&L insurance fund turned into such a mess. ...In movies such as
George Romero
George may refer to:
People
* George (given name)
* George (surname)
* George (singer), American-Canadian singer George Nozuka, known by the mononym George
* George Washington, First President of the United States
* George W. Bush, 43rd President ...
's ''Night of the Living Dead'' and ''Dawn of the Dead'', corpses climb out of their graves and walk around hunting for food. They are hungry for only one thing—human flesh. As soon as these living-dead "zombies" feed on another human, the human quickly dies and becomes a zombie too. Many S&Ls have, for some time, been zombie institutions. These institutions were insolvent in the sense that their assets had fallen below the level at which they could cover their deposit debt. These zombie S&Ls were able to survive only because they could feed off taxpayers through the device of government-guaranteed federal deposit insurance."
Tyler Cowen
Tyler Cowen (; born January 21, 1962) is an American economist, columnist and blogger. He is a professor at George Mason University, where he holds the Holbert L. Harris chair in the economics department. He hosts the economics blog ''Marginal R ...
, a professor of economics at
George Mason University
George Mason University (George Mason, Mason, or GMU) is a public research university in Fairfax County, Virginia with an independent City of Fairfax, Virginia postal address in the Washington, D.C. Metropolitan Area. The university was origin ...
, wrote for the ''New York Times'' in April 2011 that "If enough depositors fear frozen accounts, the banks will be emptied out, and they also will require additional government bailouts, on top of the bailouts for the bad real estate loans. The banks come to resemble empty shells, conduits for public aid but shrinking and unprofitable as businesses — and, to a large extent, that is already the case in Ireland. Portugal is moving in this same direction, toward being a land inhabited by zombie banks. It’s the zombie banks that doom the current European bailout plans."
History
Japan
In 1990, Japan
suffered a collapse in real estate and stock market prices that pushed major banks into insolvency. Rather than follow the
United States of America
The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territo ...
's tough recommendation to either close or recapitalize these banks, Japan kept banks marginally functional through explicit or implicit guarantees and piecemeal government bailouts. The resulting "zombie banks" neither alive nor dead could not support long term economic growth which has resulted in economic stagnation in Japan since then.
Europe
After the
financial crisis in 2008
Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fina ...
, banks in Europe have been described as zombies; with some Eurozone banks becoming dependent on the European Central Bank (ECB) for liquidity. This keeps these banks lending to companies and fostering growth.
On July 26, 2012 the ECB’s president
Mario Draghi
Mario Draghi (; born 3 September 1947) is an Italian economist, academic, banker and civil servant who served as prime minister of Italy from February 2021 to October 2022. Prior to his appointment as prime minister, he served as President of ...
launched the
Outright Monetary Transactions (OMT) Program, which led to a significant increase in the value of sovereign bonds issued by European periphery countries. The regained stability of the European banking sector has not fully transferred into economic growth. The slow recovery is explained by bad credit allocations by zombie banks.
New restrictions imposed on European banks by the European Union, which took effect from January 2016, are meant to protect taxpayers from picking up the bill for rescuing banks as happened during the financial crisis.
United States
After the 2008 crisis, rigorous stress tests forced some banks to recapitalize. This may have prevented the phenomenon of zombie banks, but there is a possibility that
zombie companies exist; their earnings are less than their interest expenses. Such companies are therefore incapable of making a profit, since all revenue is spent on repaying creditors and paying off expenses.
Causes
Banks become zombies due to bad loans which they have made. In slow economies, businesses that borrowed from banks become unable to pay the loans back. Capital infusions to a bank, received primarily from the government but also from central bank loans, turn it into a zombie bank.
These infusions are generally referred to as regulatory forbearance. They enable the banks to postpone the recognition of their losses. The government gives zombie banks cash-flow leeway in the hope that they will be able to make profits over time, thus being able to cover their losses and revitalize. Rather than pressing businesses for repayment, however, zombie banks often use the money received from the government to extend the terms of their loans to businesses, which in turn causes the existence of
zombie companies.
Effects
The rescuing of failing financial institutions, or zombie banks, also creates
moral hazard
In economics, a moral hazard is a situation where an economic actor has an incentive to increase its exposure to risk because it does not bear the full costs of that risk. For example, when a corporation is insured, it may take on higher risk ...
: investors take risks without considering the negative consequences, since they believe the government will help them out in case investments fail. Investors do not have incentive to be concerned about the risk-reward ratio, essential for healthy economy. Other effects of zombie banking include unpredictability of future earnings due to their
non-performing assets on their balance sheet. Since zombie banks employ higher interest rates to attract investors, healthy banks suffer from competition and lose customers. Zombie banks can be reluctant to lend money to the private sector.
Further reading
* ''Zombie Banks: How Broken Banks and Debtor Nations are Crippling the Global Economy'' (New York, Wiley, 2011) by
Yalman Onaran
Yalman Onaran is a Turkish-born American financial journalist. Onaran came to the United States in 1987 to study at the College of Wooster in Wooster, Ohio. After finishing Columbia University's School of Journalism, and the Columbia University ...
See also
*
Bad bank
A bad bank is a corporate structure which isolates illiquid and high risk assets (typically non-performing loans) held by a bank or a financial organisation, or perhaps a group of banks or financial organisations. A bank may accumulate a large por ...
*
Bridge bank
A bridge bank is an institution created by a national regulator or central bank to operate a failed bank until a buyer can be found.
While national laws vary, the bridge bank is usually established by a publicly backed deposit insurance organi ...
*
Zombie company
In political economy, a zombie company is a company that needs bailouts in order to operate, or an indebted company that is able to repay the interest on its debts but not repay the principal.
Description
Zombie companies are indebted businesses ...
References
{{reflist
Bad banks
Banking
Financial crises