Zombie banks
What are ‘zombie banks’
The term ‘zombie bank’ was first introduced by Edward Kane in 1987 to describe a bank that has a negative net worth but still continues to operate. A negative net worth means that the fair value of assets is lower than the total value of liabilities. Zombie banks usually have large amounts of non-performing assets on their balance sheets making them unprofitable. A loan is considered to be a non-performing asset if no principal payments or interest have been paid for 90 days and is therefore seen to be in jeopardy of default. The fair value of an asset that is considered non-performing is considerably reduced. Zombie banks usually continue to operate until their financial situation is resolved or they are run down.
How ‘zombie banks’ emerge
Zombie banks usually start emerging when bubbles burst or a recession begins resulting in households and companies defaulting. This will increase the amount of non-performing assets making some banks net worth negative. Normally, a company with a negative net worth would be deemed insolvent. However, in the case of banks, insolvency is often avoided because banks deny and hide their problems making them seemingly solvent or the government doesn’t allow the bank to default.
The troubled banks overvalue their toxic assets in order to stay solvent. The management of these banks hopes that over time the situation will resolve itself. Due to similar hopes, this overvaluing is often overlooked by national banking supervisors.
In the case that a bank’s insolvency becomes evident, it often will not be allowed to fail by the national government because letting it fail would be very costly and could cause a systemic crisis like in 2008 when Lehman Brothers was allowed to default. To prevent a bank defaulting, financial support is provided either in the form of cash injections, by lending money using non-performing assets as collateral or by buying the non-performing assets for a price often exceeding their
The term ‘zombie bank’ was first introduced by Edward Kane in 1987 to describe a bank that has a negative net worth but still continues to operate. A negative net worth means that the fair value of assets is lower than the total value of liabilities. Zombie banks usually have large amounts of non-performing assets on their balance sheets making them unprofitable. A loan is considered to be a non-performing asset if no principal payments or interest have been paid for 90 days and is therefore seen to be in jeopardy of default. The fair value of an asset that is considered non-performing is considerably reduced. Zombie banks usually continue to operate until their financial situation is resolved or they are run down.
How ‘zombie banks’ emerge
Zombie banks usually start emerging when bubbles burst or a recession begins resulting in households and companies defaulting. This will increase the amount of non-performing assets making some banks net worth negative. Normally, a company with a negative net worth would be deemed insolvent. However, in the case of banks, insolvency is often avoided because banks deny and hide their problems making them seemingly solvent or the government doesn’t allow the bank to default.
The troubled banks overvalue their toxic assets in order to stay solvent. The management of these banks hopes that over time the situation will resolve itself. Due to similar hopes, this overvaluing is often overlooked by national banking supervisors.
In the case that a bank’s insolvency becomes evident, it often will not be allowed to fail by the national government because letting it fail would be very costly and could cause a systemic crisis like in 2008 when Lehman Brothers was allowed to default. To prevent a bank defaulting, financial support is provided either in the form of cash injections, by lending money using non-performing assets as collateral or by buying the non-performing assets for a price often exceeding their