Do Zombie Banks Provide Real Liquidity?

A zombie bank is an alarming characteristic of the modern economy.

The term zombie bank refers to a financial institution that has an economic net worth which is less than zero; basically, it signifies that this financial institution is in debt. A financial institution that is in debt itself should no longer be called a financial institution as it does not have any money that it can provide to other people; in addition, it should not be trusted with people’s money as this money may actually be used to pay off debts.

Nevertheless, even though zombie banks are in debt, they are continued to be called financial institutions. They can continue performing in this capacity because their debts are being settled through credit provided by the

government.

Liquidity is a term used to describe a market’s ability to sell an asset quickly without having to lower its price. This generally happens when the specific asset is in high demand, and will be sold off quickly regardless of the market’s requirements. For example, gold is an asset that is almost always in high demand; therefore, the gold market has a high market liquidity. One asset with the highest market liquidity is cash. Cash can be used instantly to buy virtually anything and the speed with which it is used has no effect on its value. You don’t have to wait for someone who wants to accept cash as cash is the basic medium of financial transactions all over the world.

The liquidation of an asset is basically the exchanging of an asset with low market liquidity for an asset with high market liquidity. The asset with high market liquidity is usually provided in a larger amount, relative to the availability of that asset, than the asset with lower market liquidity. The most usual form of liquidation is the exchange of any asset for cash which is referred to as selling.

If gold is provided to a zombie bank, cash is provided in exchange. However, the cash that is provided by the zombie bank is not an asset that the zombie bank owned. Therefore, the asset provided will likely be government money proposed for a completely different purpose. As a consequence, zombie banks definitely do not offer any real form of liquidity for assets due to the fact that they don’t possess the most liquid asset of all — money.


Originally published at www.fxbtrading.com on August 29, 2017.