On my campus this semester the students have been shooting at each other.
A popular campus game called Humans vs. Zombies is under way, and the zombies are winning! Unfortunately, the same is true for the U.S. banking industry.
Humans vs. Zombies is a fun game of tag invented by students at Goucher College in 2005. The human players defend themselves from unarmed zombies with Nerf guns and balled-up socks. Zombies are always on the attack and gain a “kill” when they tag a human. The number of zombies grows as more humans are tagged.
There are too many zombies on my campus — and too many zombie banks in the U.S.
Zombie banks are financial institutions that should be closed but operate with implicit or explicit government support. The term was first used in 1987 during the savings-and-loan crisis and in Japan throughout the 1990s, when the government propped up its banking sector.
In the U.S. today, the federal government maintains an equity interest in nearly 400 banks. This includes support for three banks in Idaho — Intermountain Community Bank, Idaho Bancorp and Syringa — to the tune of $42 million.
In addition, the government continues to run two of the largest financial institutions in the world: mortgage servicing firms Fannie Mae and Freddie Mac. Fannie and Freddie are still asking for more support after receiving nearly $200 billion in cash infusions since 2008.
It is surprising the government would need to take so large a stake in what is now a very profitable industry. The Federal Deposit Insurance Corp. reports that U.S. banks earned more than $100 billion in 2011.
Profitability in Idaho is still weak but improving. The same FDIC report shows that Idaho banks last year had increased revenue and much smaller provisions for bad loans than the year before, reducing bottom-line losses from $63.6 million in 2010 to $23.5 million in 2011. Nearly 40 percent of these losses are attributable to the three government-supported, or zombie, banks in the state.
A growing body of economic research shows that government ownership of banks slows the economy. In a widely cited 2002 study, researchers at Harvard University found that in countries where government ownership of banks was high, the economy grew slower and was less productive. More recent research published in the Journal of Financial Intermediation used data for 65 countries from 2003 to 2007 and showed that political considerations depress banks’ financial performance.
Given the recent stock market run-up, this is a good time to sell. Year-to-date the S&P 500 index is up over 7 percent and the KBW Bank Index is up more than 11 percent. If the government remembers to buy low and sell high, it may just fetch a good price for the taxpayers.
It’s also a good time to sell the mortgage banks. But unlike so many homes, they are not on the market.
The Federal Housing Finance Agency announced in February that it expects to continue operating Fannie Mae and Freddie Mac under conservatorship until at least Dec. 31, when the law authorizing the bailout funds expires. It’s probably better to sell now than wait until the cash runs out.
Give them back to humans. Kill the zombie banks.
PETER CRABB Professor of finance and economics at Northwest Nazarene University in Nampa