Zombie Nation

In a post a little over a month ago, “Watch the Zombie Bank Lifeline,” I suggested that market observers needed to keep an eye on the expiration date of the transaction account guarantee program within the FDIC’s Temporary Liquidity Guarantee Program.   The transaction account guarantee program offers unlimited protection to certain low interest bank accounts — this prevented a mass exodus of bank deposits during the height of the financial crisis.  But this guarantee also represents a crutch by which deposits remain in institutions which may be too financially compromised to grow their loan portfolios — in other words, deposits in these institutions have a velocity of zero.  The program is supposed to be temporary and is due to expire on December 31, 2009. 

Now comes word from Reuters that regulators are considering extending the program for another six months.   While a worthy temporary measure, such support of unworthy institutions could lead to the creation of Zombie Banks, the living dead of the financial world, competing on equal footing for deposits with healthy firms, but unable to lend the money back into the economy.   The decision on extension will be worth watching — the longer this program is extended, the greater the risk of this becoming the new status quo; the real dangers is that yesterday’s temporary program becomes today’s extended program becomes tomorrow’s permanent program.  A permanent guarantee program, while not on the table now, would almost certainly doom us to stunted economic growth as it sustains otherwise unsustainable banks.  Stay tuned…

 

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