Loading the player...

What is a 'Zombie Bank'

A zombie bank is an insolvent financial institution that only continues to operate thanks to either explicit or implicit government support. Zombie banks have large amounts of nonperforming assets on their balance sheets.


Zombie banks are creatures of financial repression, in which central banks keep debt-burdened banks, corporations and households on life support, instead of allowing nature to take its course and creative destruction to do its work.

It is dangerous to allow large numbers of technically dead banks to continue operating, as American policymakers concluded during the savings and loan crisis (S&L) — when the phrase zombie bank was first coined by Edward Kane of Boston College in 1987. By not liquidating zombie banks, investors’ capital is trapped, instead of being put to more productive use. Rather than strengthening healthy companies and supporting economic recovery, zombie banks prop up rotting corporations. By distorting market mechanisms, the resulting misallocation of resources weakens the whole financial system.

When its real estate bubble collapsed in 1990, Japan kept its insolvent banks going, rather than recapitalizing them or letting them go bust, as the U.S. did during the S&L crisis. Nearly 30 years later, Japan's zombie banks still have large amounts of non-performing loans on their books. Instead of helping Japan to recover, these banks locked its economy into a deflationary trap it has never escaped from.

Zombie Banks in Europe

In its desperation to avoid becoming Japan after the 2008 global financial crisis, the eurozone made the same mistake. Zombie banks, stuffed with toxic liabilities, have increased lending to existing impaired borrowers, instead of financially healthy or new borrowers. This zombie lending behavior by distressed banks, to avoid realizing losses on outstanding loans, has led to a significant misallocation of credit, which has hurt creditworthy firms. No other economy has taken longer to recover.

The European Central Bank has warned that debt sustainability is the biggest risk to financial stability, if interest rates rise. In other words, zombie banks that are dependent on ECB liquidity may be unable to absorb the losses if zombie companies, that have also only survived thanks to the ECB’s regime of artificially cheap finance, go under. Europe's banks are still sitting on $1 trillion of dud loans.

America's Recapitalized Banks Are Still Vulnerable

Bank stress tests were more rigorous in the U.S. than in Europe, in the wake of the financial crisis. They forced the weakest banks to raise private capital and sell off toxic legacy assets. But there may be just as many zombie firms, whose interest expenses exceed earnings before interest and taxes, stalking the economy in America as there are in Europe, according to the Bank of International Settlements. So, quantitative easing may have only postponed the day when banks in Europe and America will have to write-off bad debt.

  1. Zombie ETF

    A zombie ETF refers to exchange traded funds that are seeing ...
  2. Zombie Title

    A zombie title is a title that remains with a homeowner who believes ...
  3. Zombie Foreclosure

    Zombie foreclosure refers to the situation caused when a homeowner ...
  4. Troubled Asset

    A troubled asset is an asset held by banks, for which there may ...
  5. Bank

    A bank is a financial institution licensed as a receiver of deposits. ...
  6. Bad Bank

    A bad bank is one that is set up to buy the bad loans of another ...
Related Articles
  1. Investing

    Don't Get Trapped in a Zombie Foreclosure

    Understand how foreclosures work and you can avoid the disastrous consequences of having a zombie foreclosure.
  2. Personal Finance

    How To Beat Off A Zombie Debt Collector

    Sounds like a bad horror movie, but it really could happen to you. Here's how to identify zombie debt and send collectors back to the dead-debt graveyard.
  3. Investing

    Why Are Banks Hold Nearly $2.5 Trillion in Bonds?

    Banks are holding the biggest dollar amount of bonds since the central bank began compiling data in 1973
  4. Investing

    European Banks: Growth in 2016?

    Understand the potential growth drivers of the European banking sector and whether 2016 will be a year of growth or continued stagnation.
  5. Personal Finance

    The Evolution of Banking Over Time

    Discover how the evolution of banking has changed the business model. Find out how this system of money management developed into what we know today.
  6. Insights

    The Role of Commercial Banks in the Economy

    We interact with commercial banks daily to carry out simple financial tasks. That said, the function and creation of a commercial bank is anything but simple.
  7. Insights

    Euro Falls to 20-Month Low After Italian Referendum (JPM)

    Is the European banking crisis knocking ?
  8. Insights

    How Central Banks Control the Supply of Money

    A look at the ways central banks pump or drain money from the economy to keep it healthy.
  1. What factors are the primary drivers of banks' share prices?

    Find out which factors are most important when determining the share price of banks and other lending institutions in the ... Read Answer >>
  2. What is the banking sector?

    Learn why the banking sector is a vital industry to our economy, what it does to drive the economic growth and understand ... Read Answer >>
  3. How does investment banking differ from commercial banking?

    Discover how investment banking differs from commercial banking, the responsibilities of each and how the two can be combined ... Read Answer >>
  4. What's the difference between investment banks and commercial banks?

    Understand the principal differences between investment banks and commercial banks, and the areas of banking services that ... Read Answer >>
  5. How do leverage ratios help to regulate how much banks lend or invest?

    Learn what leverage ratios mean for banks, how regulators restrict leverage, and what impact ratios have on a bank's ability ... Read Answer >>
  6. What is the difference between investment banks and merchant banks?

    Merchant banks and investment banks, in their purest forms, are different kinds of financial institutions that perform different ... Read Answer >>
Trading Center