A zombie bank is a financial institution that has become insolvent but still remains open and is kept afloat only through support of the government. The term “zombie banks” was first coined by Edward Kane of Boston College in 1987, during the savings and loan crisis. While the term has been used to describe many kinds of banks, it is primarily applied to savings and loan, commercial banks, investments banks, and insurance companies.

Zombie Banks may have a variety of characteristics that set them apart, including weak profitability, high levels of nonperforming loans, and being undercapitalized or underfunded. They are often unable to generate sufficient profits or attract enough investment to cover their costs or pay back bonds or other debt. Zombies can also engage in riskier activities because they know the government will bail them out should anything go wrong.

The consequences of having zombie banks can be devastating, both for the banks and for the economy as a whole. For example, zombie banks can lead to a misallocation of resources, as potentially more efficient firms are crowded out by the inefficient ones supported by risk-free government subsidies. This misallocation can then lead to slower economic growth, significantly reducing GDP. They can also lead to a drain of private resources, as the government is forced to raise taxes or issue more debt in order to provide the subsidies needed to keep the zombie banks afloat.

Restoring zombie banks back to health can be incredibly costly, often costing hundreds of billions of dollars and taking years to complete. This can reduce available resources for other investments and can prevent investors from focusing their resources on more profitable opportunities. Additionally, zombie banks can lead to a lack of confidence in the banking system as a whole and can cause individuals and businesses to become hesitant to put their money in banks and instead turn to more money-savory options such as gold and other precious metals.

In conclusion, zombie banks can be a serious issue, as they can lead to slower economic growth, reduce resources available for more efficient investments, and cause investors to lose confidence in the banking system. Although it may sometimes be unavoidable to keep zombie banks running in order to prevent financial panics, governments should be aware of the risk of misallocation of resources and the significant costs associated with them. Ultimately, zombie banks can significantly increase the financial burden of taxpayers and limit the potential gains from more efficient investments.