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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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    Cited by:

    1. Kok, Christoffer & Müller, Carola & Ongena, Steven & Pancaro, Cosimo, 2023. "The disciplining effect of supervisory scrutiny in the EU-wide stress test," Journal of Financial Intermediation, Elsevier, vol. 53(C).
    2. Maximilian Gobel & Nuno Tavares, 2022. "Zombie-Lending in the United States -- Prevalence versus Relevance," Papers 2201.10524, arXiv.org, revised Jul 2022.
    3. Francesco Marchionne & Michele Fratianni & Federico Giri & Luca Papi, 2022. "Frequency vs. Size of Bank Fines in Local Credit Markets," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 8(3), pages 549-583, November.
    4. Bernhardt, Dan & Koufopoulos, Kostas & Trigilia, Giulio, 2021. "The pitfalls of pledgeable cash flows : soft budget constraints, zombie lending and under-investment," The Warwick Economics Research Paper Series (TWERPS) 1327, University of Warwick, Department of Economics.
    5. Werner Hölzl & Michael Böheim & Klaus S. Friesenbichler & Agnes Kügler & Thomas Leoni, 2021. "Staatliche Hilfsmaßnahmen für Unternehmen in der COVID-19-Krise. Eine begleitende Analyse operativer Aspekte und Unternehmenseinschätzungen," WIFO Studies, WIFO, number 66624, December.
    6. Kasinger, Johannes & Krahnen, Jan Pieter & Ongena, Steven & Pelizzon, Loriana & Schmeling, Maik & Wahrenburg, Mark, 2021. "Non-performing loans - new risks and policies? NPL resolution after COVID-19: Main differences to previous crises," SAFE White Paper Series 84, Leibniz Institute for Financial Research SAFE.
    7. Acharya, Viral & Crosignani, Matteo & Eisert, Tim & Eufinger, Christian, 2020. "Zombie Credit and (Dis-)Inflation: Evidence from Europe," CEPR Discussion Papers 14960, C.E.P.R. Discussion Papers.
    8. Choudhary, M. Ali & Jain, Anil K., 2021. "Corporate stress and bank nonperforming loans: Evidence from Pakistan," Journal of Banking & Finance, Elsevier, vol. 133(C).
    9. António Afonso & Francisco Gomes Pereira, 2022. "Unconventional Monetary Policy in the Euro Area. Impacts on Loans, Employment, and Investment," CESifo Working Paper Series 9610, CESifo.
    10. Alessandra Iannamorelli & Stefano Nobili & Antonio Scalia & Luana Zaccaria, 2021. "Asymmetric Information and Corporate Lending: Evidence from SMEs Bond Markets," EIEF Working Papers Series 2105, Einaudi Institute for Economics and Finance (EIEF), revised Mar 2021.
    11. Luc Laeven & Glenn Schepens & Isabel Schnabel, 2020. "Zombification in Europe in times of pandemic," ECONtribute Policy Brief Series 011, University of Bonn and University of Cologne, Germany.
    12. Falco J. Bargagli-Dtoffi & Massimo Riccaboni & Armando Rungi, 2020. "Machine Learning for Zombie Hunting. Firms Failures and Financial Constraints," Working Papers 01/2020, IMT School for Advanced Studies Lucca, revised Jun 2020.
    13. Diana Bonfim & Leonor Queiró & Luísa Farinha, 2021. "Heterogeneity in loan pricing: the role of bank capital," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.

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    More about this item

    Keywords

    zombie lending; bank supervision;

    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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