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Oct 27Doug Smith

Buzzword of the Week: Zombie Bank

Oct 27Doug Smith

Just in time for Halloween, this week’s buzzword comes again from the treasure trove at Investopedia: Zombie Bank.

A zombie bank is a bank or financial institution with negative net worth. Although zombie banks typically have a net worth below zero, they continue to operate as a result of government backings or bailouts that allow these banks to meet debt obligations and avoid bankruptcy. Zombie banks often have a large amount of nonperforming assets on their balance sheets which make future earnings very unpredictable.

The term was first coined in 1987 to explain the savings and loan crisis which led to a large number of financial institutions declaring bankruptcy. Quite often, when a bank is deemed a zombie bank, customers will flood the institution in a bank run, only worsening the situation. This was seen during the financial crisis of 2008-2009 in which a large number of national and regional banks became insolvent and forced the U.S. government to issue a bailout package to keep the financial sector afloat.

 

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