What it is:
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.