Zombie Banks: How Broken Banks and Debtor Nations Are Crippling the Global Economy

Zombie Banks

ZOMBIE BANKS

 How Broken Banks and Debtor Nations Are Crippling the Global Economy 

By Yalman Onaran

Bloomberg News

Foreword by Sheila Bair 

What are zombie banks?  Simply stated, they are insolvent financial institutions whose equity capital has been wiped out so that the value of their obligations is greater than their assets.  Instead of going bankrupt and “dying,” these banks are allowed to stay “alive” through capital infusions from the government, loans from central banks, or put another way, bailouts.  Sound familiar?

Why has the banking industry gone from such respectable “White shoe” roots to being the most demonized field around? According to veteran Bloomberg News reporter and financial banking sector expert, Yalman Onaran, zombie banking has become standard operating procedure for big debtor nations.  He describes this concept in detail in his new book, ZOMBIE BANKS: How Broken Banks and Debtor Nations are Crippling the Global Economy (Wiley/Bloomberg Press; November 2011).

Three years after the global financial crisis, zombie banks are still around. These institutions continue to operate thanks to the help of national governments that prop them up, print more money, and allow them to avoid financial punishment. Presenting an in-depth look at the issues surrounding this financial phenomenon, ZOMBIE BANKS tackles the terror head on, demonstrating how this practice has failed in the past, and why it's destined to do so again.

Looking at examples from around the world, it proves that the vast sums invested in keeping these banks afloat has failed to save the United States, the EU, or Japan from their current economic misery.  Only by closing the books on these zombies can any country hope to start rebuilding. Onaran brings together exclusive and extensive commentary from bank executives, regulators, politicians, and policymakers from around the world, including Nobel economics prize winner Joseph Stiglitz and for FDIC Chairman Sheila Bair to show how the practice of zombie banks is detrimental to all nations.

For example, the U.S. government almost went the way of Ireland when it came close to issuing a blanket guarantee for its banks' liabilities. Timoth Geithner, who was head of the New York Fed at the time, was the biggest proponent of it while Sheila Bair, who served as chairman of Federal Deposit Insurance Corp. until mid-2011, fought against it. While Bair won that debate, the U.S. still propped up many of its failing banks even after letting Lehman Brothers go down. The capital injected into Citigroup and Bank of America at the height of the crisis exceeded their market values. Still, instead of seizing those failed lenders, cleaning them up and selling off their good assets, the government let them live as zombies.

Onaran looks at these and other complex financial machinations which have led the global economy to this point and details the harsh realities that must be faced, and the serious steps that must be taken, in order to get things headed in the right direction.  ZOMBIE BANKS outlines the essential steps that must be taken to get rid of these institutions once and for all.  Nowadays, bankers boast of being in the business of risk management. That has become a catchword hiding risk in derivatives or off-balance sheet vehicles, exasperating the domino effects of a crisis somewhere in the rest of the world. Risk can shift and spread but it never disappears. We'll learn that lesson once again during the next blowup.

Onaran points out that there is also a strong need for better rules to prevent financial institutions from getting to that point. The best deterrent is a strong capital buffer. The safe ratio is around 20 percent, more than twice what recent international talks by regulators came up with. Even if they’re not zombies right now, the biggest global banks are in danger of becoming zombies in the next crisis or the one after that because they’re too big to fail and too big to manage. Onaran has written an accessible “must-read” for the majority of us trying to understand the complex financial issues ruling the world right now. 

About the Author

Yalman Onaran is a veteran financial reporter at Bloomberg News and has studied bank insolvency for decades. One of the first reporters to break the news of the collapse of Lehman Brothers and Bear Stearns, he also opened the Istanbul bureau of Bloomberg News and exposed thirteen insolvent Turkish banks which the government was allowing to continue to operate. Onaran's work has appeared in the New York Times, Washington Post, Chicago Tribune, Bloomberg, Businessweek, Frankfurter Allgemeine Zeitung, and numerous other news outlets around the world. 

Zombie Banks

How Broken Banks and Debtor Nations Are Crippling the Global Economy

By Yalman Onoran

Wiley/Bloomberg Press; November 2011

Hardcover ISBN: 978-1-1180-9452-5

Also available in e-book formats