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On-Site Inspecting Zombie Lending

Author

Listed:
  • Diana Bonfim

    (Banco de Portugal; Catholic University of Portugal (UCP) - Catolica Lisbon School of Business and Economics)

  • Geraldo Cerqueiro

    (Catolica-Lisbon SBE)

  • Hans Degryse

    (KU Leuven, Department Accounting, Finance and Insurance; Centre for Economic Policy Research (CEPR))

  • Steven Ongena

    (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR))

Abstract

Banks may have incentives to continue lending to “zombie” firms in order to avoid or delay the recognition of credit losses. In spite of growing regulatory pressure, there is evidence that “zombie lending” remains widespread, even in developed countries. We exploit information on a unique series of authoritative on-site inspections of bank credit portfolios in Portugal to investigate how such inspections affect banks’ future lending decisions. We find that following an inspection a bank becomes up to 9 percentage points less likely to refinance a firm with negative equity, implying a halving of the unconditional refinancing probability. Hence, banks structurally change their lending decisions following on-site inspections, suggesting that – even in the age of reg-tech – supervisory “reg-leg” can remain a potent tool to tackle zombie lending.

Suggested Citation

  • Diana Bonfim & Geraldo Cerqueiro & Hans Degryse & Steven Ongena, 2020. "On-Site Inspecting Zombie Lending," Swiss Finance Institute Research Paper Series 20-16, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2016
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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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