Zombie Bank

Everybody loves a good zombie movie (or TV series), but nobody likes a zombie bank.

When a bank is unable to pay its debts (a.k.a. “insolvency”), but continues to operate using government support as a crutch, you get a zombie bank. Zombie banks are basically on life support, because they can’t stay alive on their own. The term was created in the late 80s after the savings and loan crisis in the 70s.

Zombie bank is a term used by people who generally disapprove of governments bailing out banks, since they’re banks that shouldn’t be alive, but are...dead banks walking. When large banks that lots of consumers use and depend on...plummet...it’s a lose-lose situation.

If governments support these banks (creating zombie banks), they’re saving those consumers’ butts, but they’re also signaling to banks, “hey, if you’re irresponsible again, we’ll totally just bail you out, no problem, bro.”

If governments let the market take its course, allowing for creative destruction, then those consumers are screwed, but this signals to the banks, “hey man, if you screw around with people’s money again, don’t count on us to bail you out.”

The latter incentivizes banks to be more responsible with consumers’ money, and it also incentivizes consumers to choose their banks more wisely.