Help in European Financial Crisis Could Spawn ‘Zombie Banks’
Few would begrudge Mario Draghi his boast last week that he and the European Central Bank had prevented a disastrous credit crisis by showering banks with cheap loans in December.
But beneath the gratitude toward Mr. Draghi, the president of the central bank, lurks a fear that the easy money could simply be creating the conditions for another banking crisis several years from now.
Because of the central bank’s cheap financing, some economists warn, sick banks now face less pressure to confront their problems — to clean out bad loans and other impaired assets, or even wind down operations if there is no hope of a turnaround. The European Central Bank, they say, could inadvertently spawn a cohort of “zombie banks,” burdened by nonperforming loans and assets that remain on the books, like the ones that helped make the 1990s a lost decade for Japan.
“It’s a huge bet,” said Charles Wyplosz, a professor of economics at the Graduate Institute in Geneva. “If the crisis ends up well, the E.C.B. will have pulled off a miracle. If things go wrong then commercial banks will be in a much worse situation than they were before.”
Professor Wyplosz said the central bank might be making the banking system more fragile by encouraging institutions to load up on risky assets, especially government bonds from troubled euro zone countries like Spain or Italy. Banks can use those assets as collateral for more loans from the central bank.
In December, the European Central Bank invited banks to borrow money at the benchmark interest rate of 1 percent for three years, compared with a previous maximum maturity of one year. Banks could borrow as much as they wanted provided they posted collateral. They jumped at the opportunity: 523 banks borrowed 489 billion euros, or $647 billion.