Zombie Bank

A zombie bank is a financial institution that is insolvent but continues to operate due to government support. These banks are often characterized by high levels of non-performing loans, low capital ratios, and weak management. Zombie banks can pose a significant risk to the financial system, as they can be a source of financial contagion and can hinder economic growth.

There are a number of factors that can contribute to the creation of zombie banks. One common factor is government bailouts. When governments bail out banks, they effectively remove the risk of failure from the equation. This can lead to moral hazard, as banks may take on more risk in the knowledge that they will be bailed out if they fail.

Another factor that can contribute to the creation of zombie banks is a lack of competition. When there is little competition in the banking industry, banks can charge higher fees and lower interest rates. This can make it difficult for healthy banks to compete, and can lead to the creation of zombie banks.

Zombie banks can have a number of negative consequences for the financial system. They can be a source of financial contagion, as they can spread losses to other banks and financial institutions. They can also hinder economic growth, as they may be unable to lend to businesses and consumers.

There are a number of things that can be done to address the problem of zombie banks. One important step is to reduce government bailouts. This will help to remove the moral hazard that encourages banks to take on too much risk. Another important step is to increase competition in the banking industry. This can be done by reducing barriers to entry for new banks, and by breaking up large banks.

Zombie banks are a serious threat to the financial system. However, there are a number of things that can be done to address the problem. By reducing government bailouts and increasing competition in the banking industry, we can help to prevent the creation of zombie banks and protect the financial system from their negative consequences.