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Return of the Zombies

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Summary

This article explores the concept of 'zombie banks', which are banks that continue to operate despite being technically insolvent. It looks at examples of zombie banks from the past, such as the S&Ls in the US in the 1980s and Japanese banks in the 1990s, as well as contemporary examples such as First Republic Bank. It examines the various responses to zombie banks, including private and public sector solutions, and the risks associated with them. It also looks at the possible solutions for First Republic Bank, which may involve a combination of public and private sector solutions.

Q&As

What is the zombie metaphor used to describe in the article?
The zombie metaphor is used to describe insolvent financial institutions that are able to continue operating thanks to explicit or implicit support from the government.

What was the response taken by policymakers during the S&L crisis?
During the S&L crisis, policymakers first took steps to deregulate the industry in the hope it could grow out of its problems, and then adopted a policy of forbearance to give it time to recover.

What has been the impact of zombie banks on funding costs?
The impact zombie banks have on funding costs can either be direct, as they force up the price all banks have to pay for deposits, or indirect, through higher deposit insurance assessments on the entire industry.

What solutions are available to deal with zombie banks?
The solutions available to deal with zombie banks are a private-sector solution, a public-sector solution and a mixed public/private solution.

What was the outcome of Japan's resolution of its banking crisis in the 1990s?
The outcome of Japan's resolution of its banking crisis in the 1990s was that banks had written off around $1 trillion in bad assets at a cost to the government of over $200 billion. The cost to the country was greater: A “lost decade” of subpar economic growth.

AI Comments

👍 This is an interesting and informative article about the history and evolution of zombies in popular culture and their financial implications. It is well-researched and provides a comprehensive overview of the subject.

👎 This article is overly long and overly detailed, making it difficult to read and comprehend. It also lacks any real insights or solutions.

AI Discussion

Me: It's about the return of the "zombie" banks. It talks about the similarities between the banking crisis of the 1980s and today. It also talks about the risks of creating zombie banks and the steps that have been taken to try and address the issue.

Friend: Wow, that's really interesting. What implications does the article have?

Me: The article points to the fact that zombie banks can cause financial instability, since they can accumulate more losses, bid up funding costs and infect other financial institutions. The article also warns that delaying the resolution of a zombie bank can have serious economic consequences, as was the case in Japan in the 1990s. Additionally, the article shows that the authorities have a responsibility to shut off the liquidity taps if a zombie bank accumulates too many losses. Finally, the article suggests that a mixed public/private solution may be the best way to resolve a zombie bank situation.

Action items

Research the Japanese banking crisis of the 1990s and the impact it had on the country's economy.
Analyze the current banking crisis in the US and the potential solutions to the problem.
Explore the potential implications of a mixed public/private solution to the banking crisis.

Technical terms

Return of the Zombies: A metaphor for the return of financial institutions that are technically insolvent but continue to operate due to government support.
Banking Crisis: A financial crisis in which banks are unable to meet their obligations and are at risk of failing.
Deutsche/Numis: Deutsche Bank is a German multinational investment bank and financial services company. Numis Securities is a British corporate broker and investment bank.
European Banks: Banks located in Europe.
UK Challenger Banks: Banks in the United Kingdom that are challenging the traditional banking system.
Marc Rubinstein: A financial sector analyst.
Night of the Living Dead: A 1968 horror movie directed by George Romero.
Savings-and-Loan (S&L): A financial institution that specializes in accepting savings deposits and making mortgage and other loans.
FSLIC: The Federal Savings and Loan Insurance Corporation, a former US government agency that provided deposit insurance for savings and loan associations.
Hougachou: A traditional Japanese festival for raising money from the community.
Silicon Valley Bank: A US-based bank that collapsed in March 2021.
Silvergate: A US-based bank.
Federal Home Loan Bank of San Francisco: A US government-sponsored enterprise that provides funding to banks.
Tangible Common Equity: A measure of a company's financial strength that is calculated by subtracting intangible assets and preferred equity from total common equity.
Non-Performing Loans: Loans that are in default or close to being in default.
Mark-to-Market Loss: The difference between the current market value of an asset and its book value.
Adverse Selection: A situation in which one party has more information than the other and uses it to their advantage.