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Zombie Bank Questions and Answers
Zombie Banks Are Alive and Not Well
The topic of "Zombie Banks" is a banking issue that continues to impact both real estate lending and small business financing. The term "Zombie Bank" has been with us since the 1980s when it appeared in reference to savings and loan institutions with a negative net worth.
Zombie Banks Might Be Alive, But They Are Certainly Not Well
Banks are always supposed to have more assets than liabilities. However, this is not the case with a Zombie Bank. If they were treated as "normal" business enterprises, Zombie banking institutions would be forced to file for bankruptcy protection. With both the savings and loan crisis and the more recent banking bailout, many "bankrupt" banks have been kept artificially alive and operating by government guarantees and financial support.
Is your bank a Zombie Bank?
I have always been afraid of banks.— Andrew Jackson
How Many Problem Banks? (According to the FDIC)
There were 844 banks on the "Problem Bank" list at the end of 2011, and 92 banks failed during 2011. The Federal Deposit Insurance Corporation (FDIC) was monitoring 651 to 770 Problem Banks during most of 2012-2013. This represents about 11 percent of all banks. In comparison, there were under 50 banks on this "troubled bank" list before the recent banking crisis. As 2014 began, there were 467 banks on “The List.” The total number declined to 203 as of September 30, 2015 — or still 300 percent more than before the latest financial crisis.
One Zombie Bank Headline: Problem Bank List at 20 Year High as Regulators Let Zombie Banks Remain Open
For individuals and small businesses, it is virtually impossible not to notice the downward spiral that has impacted most real estate markets during the past few years. By many accounts, banks caused this financial crisis through an ill-timed combination of risky derivatives investments tied to the value of real estate and excessive real estate lending with inadequate documentation about the creditworthiness of borrowers. Many of these are Zombie Banks that currently have a negative net worth but are still operating because of government guarantees and other credit support.
The Lasting Impact of Zombie Banks on Real Estate — Where Are Banks Spending Their Cash?
While a "Zombie Bank" is worth less than zero on paper, this does not mean that they do not have funds to lend. However, what we are seeing is that many banks have shifted their priorities away from long-term real estate financing and have emphasized funding instead for the following activities:
- Credit card financing with interest rates frequently above 20 percent. Solicitations for credit cards are still filling our mail boxes.
- Executive bonuses. The biggest incentive for bankers to repay bailout funds was to restore the ability to pay huge bonuses without government scrutiny.
- Financial derivatives. Yes, the same kind of derivatives that precipitated the financial crisis in 2008.
- Repurchasing their stock on the open market. Supposedly because it's so cheap and a good buy at current prices, but did they remember to ask themselves, "How much is stock worth for a company that has a negative net value?”
- Buying other banks (often with the encouragement of the Federal Deposit Insurance Corporation when a bank is actually closed).
A Video Explanation of Zombie Banks
What Would Thomas Jefferson Say About Zombie Banks?
While we can't be sure, we do know that Thomas Jefferson (third President of the United States) was very concerned about banks. One of his famous banking observations is shown below along with two more recent comments by contemporary financial experts:
- "Banking establishments are more dangerous than standing armies." (Thomas Jefferson)
- "The banks should have been let go." (Sheila Bair, former head of the FDIC)
- "The best way to rob a bank is to own one." (William K. Black, author of the book shown below)
A Book About the Earliest Zombie Banks
William K. Black's book is a masterpiece about what went wrong with banks starting with the savings and loan crisis in the 1980s. By most accounts, it's been all downhill since then. Zombie Banks are a major part of this important story.
Did the FDIC Drop the Banking Ball?
Not really, although the current banking problems are probably the product of multiple factors that would no doubt include inadequate oversight by the Federal Deposit Insurance Corporation. However, the head of the FDIC before the 2008 banking crisis (Sheila Bair) did an admirable job of warning everyone about reckless banking practices. Unfortunately, politicians, bankers and banking lobbyists got in her way and successfully blocked any meaningful corrective actions. The Federal Reserve has played a major role by allowing (and continuing to allow) banks to obtain huge amounts of capital at zero or near-zero cost, all the while without imposing meaningful restrictions on how these funds are used. This same mistake was made by Congress during the financial bailout of banks in 2008-2009. As one direct result, small business financing by banks has decreased to a level that most objective observers classify as non-existent.
From beginning to end, William K. Black's book provides insights that seem increasingly relevant for 2016 and beyond. As he notes in the title, "The Best Way to Rob a Bank Is to Own One."
Which Banks are Zombie Banks?
It requires both guesswork and some careful analysis to find the answer to this question. While the FDIC does publish a problem bank list on a quarterly basis, they do not "name names" when they do so. The concept of "Too Big to Fail" has played a major role in allowing banks to continue operating even when they are effectively bankrupt and fully deserving of the Zombie Bank title.
The best way to rob a bank is to own one.— William K. Black
How Long Will We Have Zombie Banks?
Most financial experts have concluded that it will probably take at least 10 years for the largest Zombie banking institutions to get back to "normal" and that many of these banks will not ultimately survive in their current ownership arrangement.
Here are two relevant comments by David Stockman in an interview reported on BillMoyers.com ("Crony Capitalism" broadcast on January 20, 2012):
- "We need not only a reinstitution of Glass-Steagall, but even a more serious limitation on banks."
- "The banks that existed then that were too big to fail are even bigger now."
What Is Next? Will Plan B Be Enough?
One of the biggest changes during the past 20 years has been how Plan B and banks are viewed. If we turn back the clock and look at what we were likely to do if we did not have enough funding for a personal or business project, it is somewhat likely that a bank would be thought of as either the primary financing source (Plan A) or as a backup source (Plan B). Now fast forward back to the present and think about how differently you might be thinking about this possibility.
I work with individuals and small businesses throughout the United States and Canada, and banks are a constant topic of concern with everyone. The more recent mentality about banking institutions tends to be reflected by questions like these:
- What if my bank says no?
- Is my bank a zombie bank?
- Should I fire my bank?
- What will the next banking crisis look like?
- What is my Plan B?
- Do I need more than Plan B?
As a stark example of how things have indeed changed for the worse in many circumstances involving banks, Plan B is now frequently not enough. I have always engaged in contingency business planning on behalf of clients. When I do this, I am particularly looking at what could go wrong and planning in advance what we will do if that happens. I am literally always asking what is next and how to react.
This "What Could Go Wrong?" mentality has simultaneously become more important and increasingly difficult when it comes to banks. Circumstances regarding problem banks are changing daily, and I am still worried about the excessive risks within the overall banking world.
What is your Plan B and beyond?
A Short Zombie Bank Musical Video
One More Thing: Why Are There Zombie Banks?
“Why?" is a very big question in the case of Zombie Banks. When the public is asked if they want banks that have a negative net worth to continue operating, the answer is a resounding "No." Nevertheless, this issue has never been subjected to a public vote.
Congress, the Federal Reserve, the FDIC and the Secretary of the Treasury were apparently governed by "Too Big To Fail" in their decision to keep throwing money down the rabbit hole. The Zombie Banks would not still be in business at all if not for a publicly-funded bank bailout AND continuing government credit guarantees AND letting banks borrow at a zero (or near zero) cost from the Federal Reserve AND a tacit agreement that the Federal Deposit Insurance Corporation will not close certain Zombie Banks. Meanwhile, the FDIC has already closed many smaller banks that were in better overall financial and management shape than the big Zombies.
The banks should have been let go.— Sheila Bair
© 2014 Stephen Bush