A bank whose net worth is less than zero, thus, is said to be a walking dead. This happens when a bank’s assets are worth less than its liabilities, or when it is expected to be insolvent in the near future. A zombie bank usually delays writing down its assets as long as possible to give the impression that it is solvent. Meanwhile, it attempts to raise new capital not to use it in its core business (lending), but instead as equity cushion. Under this situation, the bank neither functions in a proper way (it never makes new loans) nor succumbs to its fate (by declaring bankruptcy) and therefore becomes a zombie bank. Any additional capital that is not put into profitable use would help prolong the bank’s life but only for some time. It is true that additional capital can absorb the bank’s losses, but eventually the equity and unsecured credit holders would have to bear such losses.
In some instances, failing banks become zombie banks because of the government support and subsidies. But once the government lifts it support, the zombie banks eventually die.
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