Financial Giants Turning Into 'Zombie Banks': Whitney

The top U.S. financial institutions have become zombie banks that will need a decade to adjust their businesses to the new realities in the industry, analyst Meredith Whitney told CNBC.

Meredith Whitney on Closing Bell

In banking parlance, zombies have little net worth but are backed by the government and continue to meet their obligations.

Amid an environment in which new regulations demand that banks hold more capital and lending demand is uneven and likely to be taken over by smaller institutions, Whitney said the big companies face major challenges.

"The large banks which dominate most of the lending in the United States are effectively zombie banks," she said. "You've got an expense structure that just doesn't match the revenue structure. So it's a classic issue of negative operating leverage. You don't buy institutions that have negative operating leverage. This is a multi-year cycle that these guys will have to go through."

She said the term applies as well to stressed European banks such as Societe Generale that were sustaining heavy losses Wednesday amid credit concerns.

Getting back to normal probably will take large institutions, such as Bank of America , 10 years as they cope with a new regulatory environment that will demand banks change focus and cut size, Whitney added.

Following the financial crisis in 2008 and 2009, Congress took a scalpel to banking regulations, passing the Dodd-Frank reform law that requires the winddown of too-big-to-fail institutions, raises capital requirements and implements broad changes to fee structures.

In the case of BofA, Whitney praised CEO Brian Moynihan, who has come under fire as the company's shares have tumbled nearly 40 percent in the past month and more than 53 percent in the past year. Moynihan defended his performance in a CNBC interviewTuesday.

She called him "the right guy for the job" but said he faces challenges that will become familiar to the rest of the industry.

Bank of America is hardly alone with its problems. Citigroup shares hit a 12-month low Wednesday while Morgan Stanley hit its lowest price in nearly two and a half years.

And BNY Mellon announced it is cutting 1,500 jobs, or 3 percent of its workforce.

Yet Whitney said the situation now is different than 2008, the year after she rose to notoriety for warning that Citi would have to write down billions in toxic assets on its balance sheet.

"It actually reminds me more of the '70s than 2008. I think the market's actually harder now than it was in 2008 because it's a constant beatdown," she said. "There are structural economic problems that we face...huge swings in the face of uncertainty.

"The certainty is we have real structural problems in this economy that have to be dealt with on a real long-term pragmatic basis, not on a quick-fix solution basis. It's not necessary for the White House to come out and fix everything. Let's have a long-term plan around things."