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Do Zombie Banks Really Exist?

Updated on November 20, 2017
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Stephen Bush is a commercial banking and business consulting expert. He is the CEO and Founder of AEX Commercial Financing Group.

Zombie Banks Ahead
Zombie Banks Ahead

Spoiler Alert: Zombie Banks Ahead

Zombie Banks?

Please understand that I am not referring to a television show or movie but a real-life problem that is (and has been) impacting individuals and small businesses. The term first appeared more than 25 years ago when the savings and loan crisis in the United States resulted in hundreds of financial institutions with liabilities in excess of assets. This is never supposed to happen with an operational bank, but it happened over and over again with the savings and loans. The political response was a variation of “Too Many to Fail,” and Zombie Banks were born.

As we fast forward to 2017 and beyond, the precedent of Zombie Banks lives on. There are many banking institutions that are effectively bankrupt but are being kept in business through artificial government supports and guarantees. In some cases these banks are being kept on a short leash and in others they are operating with more flexibility. But they are certainly not lending normally. The failure of these Zombie Banks to operate like “real banks” is a major contributing factor to explain why the economy and real estate in particular are still functioning as if they are on life support.

Zombie Bank Summary Points
150 to 800 Banks on the FDIC Problem Bank List 2008-2017
More Info: "The Best Way to Rob a Bank Is to Own One" by William Black
Concept Originated with S&L Crisis About 30 Years Ago
More Liabilities than Assets (Negative Net Worth)

The banks should have been let go.

— Sheila Bair, former head of the Federal Deposit Insurance Corporation (FDIC)

A Tiny Bit of Good News: Not All Banks Are Zombies

This is an appropriate point to note that not all banks are Zombies. However, the abundance of Zombie shows like “The Walking Dead” is a vivid illustration of how the presence of fictional Zombies effects how everyone acts in a society where Zombies are present. While not everyone is a Zombie in these fictional shows, nevertheless nothing will ever be the same after being forced to deal with the Zombies. The behavior and choices of the real-life (but fictional) characters are restricted in one way after another.

Similarly, in 2017 there are still “good banks” in addition to the “bad banks” (that definitely include the Zombie Banks) and what I refer to as the “maybe banks.” But all of these banks act differently because of the Zombie Bank problems. To make matters worse, there are also other unresolved financial issues and problems that are causing many banks to limit their primary lending activities to payday loan programs offering the banks high rates of interest in return for making loans to high-risk customers. In the background is an important legal issue — banks no longer are legally required to avoid many financial and investment risks. For this reason alone, banks will never again be the same as they were 20 years ago and before — unless banking restrictions such as the Glass-Steagall Act are restored to limit risky bank behavior.

"The banks that existed then that were too big to fail are even bigger now. We need not only a reinstitution of Glass-Steagall, but even a more serious limitation on banks." (David Stockman)

A Music Video About Zombie Banks

"Zombies are stalking Europe: Zombie banks that are solvent in name only." (Bloomberg View, October 2014)

A Book About Banksters and Zombie Banks

It is possible that the title of William K. Black’s masterpiece about the banking industry — “The Best Way to Rob a Bank Is to Own One” — is the most concise and accurate description of what is currently wrong with business, finance, commerce and banks. The origins of Zombie Banks can be directly traced to the U.S. savings and loan crisis during the 1980s. In case you might have forgotten, this was also during the “Golden Era” of junk bonds and Michael Milken.

Risky Business by Banks

Risky investments by banks were the major contributing factor behind the banking crisis that started in 2007-2008. Despite what should have been a clear signal and lesson about reducing risk exposure, one of the largest banks lost billions of dollars several years later by an excessive exposure to volatile investments. Financial derivatives are a major example of a risky investing practice that led to the recent bank crisis — yet these investments are still being actively made by many banks.

When I refer to Zombie Bank questions and problems, I am referring to the entire scope of banking problems that include dealing with Zombie Banks. But as you probably concluded from the discussion above, the current banking difficulties extend well beyond Zombie Banks. For example, it is still difficult for most small businesses to get “normal” commercial loans.

Finding “Zombie Bank Answers” involves knowing which banks to avoid. Some of these banks are Zombies, but many more are not. The long list of banking institutions to avoid includes many banks in the “maybe bank” category, and these are not Zombie Banks at all. However, their lending practices are very similar to Zombie Banks.

There is a long list of lessons to be remembered and learned as a result of the banking excesses both then and now. Bill Black provides a detailed explanation of the how and why about both yesterday’s and today’s “banksters” operating legally and in plain sight.

The best way to rob a bank is to own one.

— William K. Black
Zombie Banks and Problem Banks
Zombie Banks and Problem Banks

Would Butch and Sundance Avoid Zombie Banks?

Butch Cassidy and the Sundance Kid loved robbing banks. Willie Sutton was another famous bank robber. What did they have in common? In both cases, nobody died during their bank robberies.

Butch and Sundance and Willie would probably feel right at home with today’s banking environment. Banks can now be looted without anyone going to jail. Billions of dollars can be stolen without the need to flee to Bolivia.

As William K. Black has described so well in his book, today’s bankers have discovered a very important lesson:

“The Best Way to Rob a Bank Is to Own One”

Do you remember the old saying about criminals returning to the scene of the crime? This book was written three years before the most recent bank crisis and bailout. The focus is on the savings and loan crisis that led to 23 percent of S&Ls failing during the 1980s.

What did we learn from that?

Perhaps the more important question is the following:

What did the bankers learn?

Banking is a very treacherous business because you don’t realize it is risky until it is too late. It is like calm waters that deliver huge storms.

— Nassim Nicholas Taleb

Zombie Banks: A Video Overview

"Banking establishments are more dangerous than standing armies." (Thomas Jefferson)

Zombie Bank Questions

Do you know how to negotiate with a Zombie Bank? Here are six additional questions about Zombie Banks (and Problem Banks) for individuals and small businesses to ask:

  • Is my bank a Zombie or is it lending like one?
  • What should I do when my bank keeps saying no?
  • Should I fire my bank and banker?
  • What is my Plan B?
  • Can you negotiate with a Zombie Bank?
  • Are all Problem Banks considered to be Zombie Banks?

A Note About Sheila Bair

Sheila Bair was head of the Federal Deposit Insurance Corporation (FDIC) in the period leading up to the banking bailout of 2008. During 2008 and 2009, she was ranked as the second most powerful woman in the world. Like Bill Black, she tried to warn everyone about impending disaster if the banks were allowed to continue in their reckless ways. After her early warnings were ignored, “Bull by the Horns” was published in 2012. As she observed, “How many times can you go into a wall at 90 miles per hour?”

I have always been afraid of banks.

— Andrew Jackson

© 2015 Stephen Bush


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    • profile image

      Howard Schneider 2 years ago from Parsippany, New Jersey

      Excellent Hub and information, Stephen. These bankers are truly disgusting hucksters.

    • prasetio30 profile image

      prasetio30 2 years ago from malang-indonesia

      Nice information. I had never heard about zombie banks. Thanks for sharing with us. Good job!