A zombie bank is a financial institution that has an economic net worth 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 in 1987 to explain the dangers of tolerating a large number of insolvent savings and loan associations 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 calls from counterparties in derivatives transactions.
A zombie bank (or other corporation) is an insolvent institution. In the finacial crash of 2008 several banks failed (Bear Stearns and Merrill Lynch) and many others should have been allowed to fail, such as JP Morgan Chase, Citibank, Goldman Sachs, RBS and Lloyds TSB. Instead the governments decided these banks were too big to fail and undertook massive bailout programs, approaching £1 triilion in the UK and allegedly up to $29 trillion in the US. The money was loaned by the governments from their central banks (US Federal Reserve and Bank of England) and given to the insolvent banks with no conditions attached. For these financial institutions, the amounts given in bailouts were nowhere near what was required to restore liquidity and they remain insolvent. This allowed these banks to return to their absurd and reckless risk taking and their practise of awarding massive bonuses, effectively for their previous failures. If they fail to learn any lessons from their previous problems (and they will) then next time round no amount of bailout will help them, even if it could be afforded and they will bring the entire global economy crashing down with them.
It is further suggested that countries like the UK and the US are actually Zombie nations, propped up and active only because of borrowed money.
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