Zombie banks may sound like financial fiction, but in 2025, the threat is all too real for global economies—and Australia is no exception. With the Reserve Bank’s rate cycle in flux, property markets adjusting, and global uncertainty lingering, understanding what zombie banks are and their potential impact is crucial for every Australian saver, investor, and borrower.
What Is a Zombie Bank?
A zombie bank is a financial institution that’s effectively insolvent but kept alive by regulatory forbearance, government support, or ultra-low interest rates. These banks earn just enough to pay interest on their debts, but not enough to repair their balance sheets or fuel new lending. They’re the walking dead of the finance world—still open for business, but unable to contribute to real economic growth.
- Origin of the term: Coined in Japan after the 1990s asset bubble burst, as banks survived on government life support.
- Key characteristics: Non-performing loans, weak capital ratios, and a reluctance (or inability) to lend to healthy businesses or consumers.
- Why it matters: Zombie banks tie up capital, sap confidence, and can slow economic recovery after downturns.
How Do Zombie Banks Threaten Australia in 2025?
Australia’s banking sector is considered robust, but it isn’t immune to global financial contagion. Here’s why the zombie bank risk is back in focus this year:
- Rising interest rates: After years of record-low rates, the Reserve Bank of Australia (RBA) has shifted to a higher rate environment. This means higher loan repayments for borrowers—and greater risk of loan defaults for banks.
- Property market volatility: Property prices have steadied in 2025, but pockets of oversupply, especially in some urban apartment markets, have left some banks with exposure to risky loans.
- Business insolvencies: Insolvency rates are up, as COVID-era stimulus fades and weaker firms struggle to refinance. Zombie firms—businesses kept alive by cheap debt—are defaulting, putting pressure on lenders’ loan books.
- International exposure: Australian banks with offshore operations or investments may be indirectly exposed if foreign institutions become zombies.
In March 2025, the Australian Prudential Regulation Authority (APRA) issued new guidance urging banks to tighten lending standards and more aggressively provision for bad loans. The goal: prevent the kind of regulatory complacency that allowed zombie banks to proliferate in Japan and Europe.
Spotting the Signs: Could Your Bank Be at Risk?
For everyday Australians, the idea of their bank turning into a zombie is unsettling. While Australia’s major banks remain well-capitalised and highly regulated, it’s important to know the warning signs:
- Stagnant or shrinking loan books: If a bank isn’t lending, it’s a red flag for underlying weakness.
- Persistent bad debt write-offs: Regular, sizeable loan losses signal trouble.
- Declining share prices or credit downgrades: Market sentiment can be an early indicator of deeper issues.
- Regulatory interventions: Watch for APRA or RBA actions targeting specific banks or lending practices.
As of 2025, the Australian Financial Claims Scheme (FCS) still guarantees up to $250,000 per account holder, per authorised deposit-taking institution (ADI). This remains a strong consumer safeguard, but a systemic crisis involving several banks could test the system’s limits.
What Can Australians Do?
While the risk of a zombie bank crisis in Australia is low compared to many parts of the world, prudence is always wise. Here’s what you can do:
- Diversify savings: Avoid keeping all your cash with one bank, especially if you have balances above the FCS cap.
- Monitor your bank’s health: Stay informed on your bank’s financial reports and any news of regulatory action.
- Review loan arrangements: If you’re a business owner, ensure your loan terms are sustainable even if rates rise further.
- Stay alert to policy changes: The RBA and APRA continue to adjust regulatory settings in response to evolving risks—these can affect lending, savings rates, and even access to credit.
The Bottom Line
Zombie banks aren’t just a relic of Japan’s lost decade—they’re a living risk for any advanced economy, especially in times of rising rates and economic transition. Australia’s regulators are taking proactive steps in 2025, but vigilance from consumers and businesses remains essential.
