Europe on the hunt for troubled ‘zombie banks’

FRANKFURT — In Europe, the zombie hunt is on.

Not for undead humans, but for zombie banks — the walking dead among lenders, those too financially troubled to loan money to an economy that desperately needs investment, growth, and jobs.

The European Central Bank, the lead crisis-fighter for the 18 countries that use the euro, is embarking on an extensive search through the books of the biggest banks. It’s an arcane exercise — but one whose results will affect jobs, businesses, and lives. The idea is to restore the system’s ability to lend by weeding out lame banks.


Efforts in 2009, 2010, and 2011 — by other EU offices with fewer powers — did not do the job. Some banks passed simulated “stress tests” on paper but needed bailouts soon afterward. So the central bank is putting its reputation on the line.

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Together with national regulators and the European Banking Authority, the central bank will first go through thousands of files from 128 of Europe’s largest banks. That will be followed by stress tests that simulate how a bank would fare in a recession or crisis. Once the verdict is delivered in October, national bank regulators will be asked to push problem banks to raise capital by selling new shares to investors, restricting dividends, or even by being restructured or bailed out.

But it’s tricky. Forcing banks to fix their problems could temporarily destabilize financial markets and cost investors and governments more money.

“The object is no more doubts about European banks,” said Vitor Constancio, the central bank’s vice president.

He said the review would leave bank finances “totally robust and transparent to all investors.”


This is Europe’s latest try at sorting out the problems in its banking system left by the global financial crisis and Europe’s ensuing turmoil over government debt. The United States tackled its banking troubles earlier, in 2008-2009.

In the depths of a debt crisis in 2012, European leaders decided to create a centralized supervisor to oversee banks. The idea was to take regulation away from national officials, who can be overly protective of domestic financial institutions. They gave the job to the European Central Bank.

Asked about the danger that the central bank might go too easy on banks, Constancio said, “We will uphold the reputation of the ECB, we will not put it at risk, and we cannot put it at risk.”

Bad loans are a particular target. Anything more than 90 days overdue will be considered a bad loan, whether the bank has declared it in default or not.

Mario Draghi, central bank president, has said some banks “do need to fail.” Analyst Nicolas Veron, who splits his time between the Brussels think tank Bruegel and the Peterson Institute for International Economics in Washington, said it’s difficult to tell how much capital is needed or how many banks might fail. Some have already started raising capital.