A participant in the Sydney Zombie Walk gestures to a bemused member of the public in Hyde Park.

'Zombie banks are essentially insolvent, bankrupt, broke: the value of their debts exceeds the value of their assets.' Photo: Lee Besford

I DON'T want to alarm you, but Europe is infested with zombies, and it's a government conspiracy. Before you grab your shotgun, pack your family into the car and block all the arterial roads leading out of the city, let me explain.

You see, the zombies in Europe aren't people but banks. And unlike the fast-moving zombies of television and movie stardom, Europe's zombie banks are more feeble and safely contained. All European governments would have to do is switch off their funding life support and many would die. That's the last thing we'd want. More on that later.

First things first: what is a zombie bank? Zombie banks are essentially insolvent, bankrupt, broke: the value of their debts (loans from other banks, investors, shareholders and deposit holders) exceeds the value of their assets (loans to you and me).

Bank balance sheets are the opposite to yours and mine. Our deposits are their debts, on which they must pay interest and our home and business loans their assets, earning them an income via our interest payments.

Banks get into trouble when the cost of their debt rises (because institutions become less willing to lend to them) and/or the return on their assets falls (because people fail to pay their mortgages, businesses fail to pay loans, or the value of the assets on which loans are secured falls).

This is what happened during the global financial crisis in the US. Its government was forced to step in to keep some banks alive, while arranging for smaller, less important banks to be shot - foreclosed - with funds returned to deposit holders under the Federal Deposit Insurance Scheme.

Market concern now centres on the European system. The International Monetary Fund's latest twice-yearly Global Financial Stability Review identifies European banks, along with European governments, as the main threats to world financial stability. In today's globalised world, with banks lending to banks all over the world, the biggest threat is that a failure in one part of the world sparks contagious fear all round the world, with banks refusing to lend to each other, or to business, or only doing so at exorbitant prices.

European Union authorities have already had to step in and provide funding life support for private banks through the European Central Bank.

Banks themselves are seeking a more sustainable footing by increasing the capital (mostly shareholder funds) they hold against their loan books. They are doing this mostly by selling unrelated assets such as insurance arms, on-selling loan books to other foreign banks and also by decreasing new lending.

The risk is that if they do so suddenly, and businesses are unable to access credit, this will prolong the economic downturn in Europe. What Europe really needs is an extended period of calm so that market jitters subside, debt becomes cheaper, banks can access funding easily and business and home borrowers can keep paying off debts.

If that all goes to plan, zombie banks could eventually return to health. The world needs banks, half-dead or alive. Banks are the lifeblood of economies, matching people with spare money to people with entrepreneurial spirit and a need for funds. This fuels jobs, growth and rising living standards.

Where does Australia sit? Compared with the chaos abroad, Australia is pretty much the elusive haven sought by the living in all zombie movies. Our banks here are alive and kicking. The economy remains a good bet for international investors, thanks to our low jobless rate, low net government debt and growth rate.

Not that we're inclined to thank the government, or Prime Minister Julia Gillard, who has observed world leaders ''would cheerfully chew their right arms off to have the macroeconomic signs that we have in this country''.

Let's hope they don't.