Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Zombie Bank

What it is:

A zombie bank is a bank with liabilities that exceed its assets (in other words, it has a net worth of zero). They do not die (hence the nickname) because they receive government support or bailouts.

How it works (Example):

Let's say Bank XYZ has $1 billion in assets (loans it has made to customers) and $2 billion in liabilities (delinquent loans, interest payments due to customers, debt it may have borrowed, etc.). Bank XYZ could declare bankruptcy and default on its obligations, but instead it receives a big loan from the federal government, which buys Bank XYZ some time to renegotiate its debt to other lenders and get its loan portfolio in better shape.

Why it Matters:

Zombie banks are very risky, and often they indicate structural problems that go far beyond the banking industry.