What is a Zombie Bank?

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 Does a Zombie Bank Work?

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 Does a Zombie Bank Matter?

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

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Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

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