Is Quantitative Easing Increasing the Presence of Zombie Banks?

Quantitative easing is a strategy being implemented by the European Central Bank, a stimulus package of sorts that is designed to decrease bond yields thereby bolstering the Euro and creating a more stable economic climate for countries that are part of the Eurozone. It is essentially going to provide money to banks in order to give these banks incentive to offer government issued bonds for lower yields, thereby making it easier and far more affordable for governments as well as citizens to borrow Euros from banks across the Eurozone.

This strategy has been praised for providing major tangible economical benefits to the Eurozone, driving yields from bonds lower than even that provided by the United States Treasury. However, this stimulus package has also been heavily criticized for the potential economic disaster it could cause due to the apparent support it is providing to zombie banks.

A zombie bank is a term that essentially refers to a financial institution that possesses virtually no net worth, which essentially means that its economic net worth is less than zero meaning that the institution is in debt, but continues to function as a financial institution because it is able to keep paying its debts thanks to credit provided to the institution by the government. Ireland was one of the first countries to experience a widespread epidemic of financial institutions that were in debt, and so should have been closed, but were able to continue functioning due to credit provided to these institutions by the Irish government. A similar trend is now being noticed in Portugal, and the fact that the threat of zombie banks has now reached the European mainland is a chilling thought for all countries that are connected to one another through their membership of the Eurozone.

It is being argued that this strategy referred to as quantitative easing is facilitating the development of zombie banks. Financial institutions that are in debt are now receiving money every single month that is allowing them to continue operating as financial institutions. The provision of funds on a monthly basis will result in financial institutions with zero actual economic value to continue providing financial services and money that is meant for the provision of low yield bonds to patrons of the institutions. Governments of financially unstable countries might even become addicted to this inflow of quantitative easing money, and would be unable to stand on their own two feet once the money stops coming in.

All in all, the threat of zombie banks is real. The threat of government money being loaned to unwitting citizens is real, and a strategy like quantitative easing will not help in stopping the spread of zombie banks. What needs to be kept in mind is that the spread of zombie banks is difficult to stop once they are somewhat prevalent in a country. An example of this is Ireland, with Portugal fast catching on, and the rest of the mainland might follow as well.