Zombie bank – What is it, definition and concept

A zombie bank is a bank or credit institution that operates in the market despite being insolvent. It does so thanks to the permissiveness of the government.

As a financial institution, the zombie bank carries out its financial work at a point of negative economic value, but with the supervision and protection of the State.

In this sense, these are institutions that have the approval of the public sector and the control and regulation institutions for the development of their activity, despite their extreme situation.

In other words, regulatory supervisory bodies can offer their support to zombie banks before they declare bankruptcy or suspension of payments.

It is often a first step in strategies seen as bank bailouts. In Spain and other Spanish-speaking countries, for example, it is similar to the creation of the so-called “bad bank”.

Motivation for the existence of the zombie bank

The reason on the part of the public powers to allow the existence and operation of these entities responds to the search for tranquility in the economic system.

In other words, it is intended that the panic of insolvency be transferred to the rest of the organizations or institutions (especially other banks) causing an incipient economic crisis.

The opposite action is that developed, for example, by the US government in the financial crisis of 2007 by allowing certain banks to fall into a similar situation of insolvency or bankruptcy.

Origin of the zombie bank concept

Zombie banks continue with their main economic activity because they are assumed to have sufficient capacity to cover their contracted debts and obligations thanks to state support.

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On the other hand, it should be noted that this specific denomination originated in the late 1980s in North America and the early 1990s in Japan.

Zombie banks respond to the growing appearance of the phenomena of bankrupt and insolvent lending structures in said historical framework.

Outstanding features

The banks that receive the denomination of zombie present some characteristics of the debt limit situation that they usually go through:

  • Insolvency plan: Under normal conditions, these credit institutions would not be able to operate as they could not respond to their debts.
  • Little risk aversion. These entities usually appear in high-risk market opportunities.
  • contagion effect. The insolvency of these entities often ends up infecting or contaminating the markets in which they operate. For this reason, governments seek their control and the non-accumulation of zombie banks.

In other words, the accumulation of insolvent entities often translates into a reduction in social welfare, capital flight and, ultimately, the economic growth of a territory stops dead.

For this reason, the State sometimes allows the existence of institutions that operate under these terms.

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