Zombie lending
Policy implications
Bank capital regulation: bank recapitalizations and capital injections Bank supervision and stress tests: regulatory on-site bank inspections, rigorous capital stress testing Corporate restructuring and bankruptcy laws: a structural insolvency regime reform which fosters initiation and resolution of insolvency proceedings
Consequences on lender and borrower
Lender: losses and increased credit risk Borrowers: trapped in cycle of debt, unable to improve and find alternative fundings
zombie firms
Mature firms that are persistently unable to cover debt costs using current profits These firms stay "alive" through "zombie loans" these firms are on the rise and survive longer
Evergreening of loans
Providing additional funding (usually) or extend existing ones to struggling borrowers to give the appearance of ongoing repayment or financial stability to mask financial distress.
insolvency framework
The design of national insolvency regimes matters for bank's incentives - Insolvency frameworks that impede corporate restructuring decrease the economic incentive for banks to commence the process of recovery, liquidation, or restructuring - Therefore, poorly designed insolvency frameworks interact with banks' evergreening motives
Why zombie lending happens?
- Banks don't want to recognize losses / write off bad debts - Extend loans hoping the situation gets better (some or all) - Want to maintain the appearance of stability
Consequences on the economy
- Keeping non viable business afloat: hinders efficient resource allocation - Creative destruction: no capital for good investments - Prevents efficient credit market functioning - Bank failure
results of the research
- find that political incentives contribute to the rising incidence of zombie firms, particularly in the run-up to elections - state-owned banks are more likely to initiate new borrowing relationships with financially weak firms due to political pressure to keep employment rates high - by engaging in zombie lending, state-owned banks may be diverting resources away from healthier firms which could lead to a slowdown in economic growth in the long run - it highlights the need for greater transparency and accountability in SO bank lending practices.
Zombie lending
Banks or FI continue to provide loans to insolvent borrowers unable to repay their debt. Kept alive through continued lending.
Covid 19 and zombie lending
Unprecedented emergency support by governments and central banks has likely increased the number of zombie firms