when its real estate bubble collapsed in 1990 japan kept its insolvent banks going rather than recapitalizing them or letting them go bust as the u s did during the s l crisis nearly 30 years later japan s zombie banks still have large amounts of non performing loans on their books instead of helping japan to recover these banks locked its economy into a deflationary trap that it has never escaped from 2
in its desperation to avoid becoming japan after the 2008 global financial crisis the eurozone made the same mistake zombie banks stuffed with toxic liabilities have increased lending to existing impaired borrowers instead of financially healthy or new borrowers this zombie lending behavior by distressed banks designed to avoid realizing losses on outstanding loans has led to a significant misallocation of credit which has hurt creditworthy firms no other economy has taken longer to recover 2the european central bank ecb has warned that debt sustainability is the biggest risk to financial stability if interest rates rise in other words zombie banks that are dependent on ecb liquidity may be unable to absorb the losses if zombie companies which have also only survived thanks to the ecb s regime of artificially cheap finance go under 3 europe s banks are still sitting on 1 trillion of bad loans 4