Posted in Finance, Accounting and Economics Terms, Total Reads: 310
Definition: Zombie Bank
A zombie bank is a financial institution that has less than zero economic net worth but remains in operation because it is made able to repay its debt by direct or indirect government support of credit.
This term was first used by Edward Kane in 1987 to showcase the risks of tolerating a large number of savings that are insolvent and loan associations and used it in the scenario of emerging Japanese financial crisis in 1993. A zombie bank can continue to work and even expand till the time creditors show confidence in the relevant government's intent to extract the money required to support its promises from present or future taxpayers. But once this ability starts looking to be doubtful, zombie banks face runs by depositors who are uninsured and counterparties in derivatives transactions bring up margin calls adding to the woes.
Zombie banks generally have a huge amount of non-performing assets on their balance sheets, which leads to future earnings being very unpredictable. Very often, when a bank is declared a zombie bank, account holders will rush to the institution resulting in a bank run, only making the situation worse. This was in particular seen during the sub-prime crisis of 2008-2009, in which quite a large number of national and local banks became insolvent and this compelled the U.S. government to issue a bailout package to keep the economy and financial organisations afloat.