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Zombie Prevalence and Bank Health: Exploring Feedback Effects

Author

Listed:
  • Clemens Possing

    (University of Waterloo)

  • Andreea Rotarescu

    (Wake Forest University, Department of Economics)

  • Kyungchul Song

    (University of British Columbia)

Abstract

This paper investigates feedback effects between bank health and zombie firms—financially distressed firms receiving subsidized credit. The literature focuses on how banks create zombies, overlooking zombies’ impact on bank health. Using Spanish firm-bank data (2005-2014), we document a vicious cycle: lower bank capital ratios are associated with higher zombie activity in served industries, while higher zombie prevalence is associated with reduced bank capital. We link this to a previously unexplored mechanism where banks respond appropriately to observable financial distress through higher provisioning, but overlook risks from relationship borrowers receiving subsidized rates. Our findings suggest that this feedback stems not from financial distress alone, but from the combination of distress with interest rate subsidies.

Suggested Citation

  • Clemens Possing & Andreea Rotarescu & Kyungchul Song, 2025. "Zombie Prevalence and Bank Health: Exploring Feedback Effects," Working Papers 130, Wake Forest University, Economics Department.
    • Handle: RePEc:ris:wfuewp:021682
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    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • 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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