Zombie Lending Research Articles

Unintended consequences of the introduction of specialized bankruptcy courts: evidence from zombie lending

We examine the economic consequences of the introduction of specialized bankruptcy courts (SBCs) from the perspective of zombie lending, using a sample of Chinese listed zombie firms in the 2016–2021 period. We find that the introduction of SBCs unexpectedly and significantly increases zombie lending, given the perverse incentives for banks and the intervention of local governments. The mechanism is that the introduction of SBCs improves the firms' bankruptcy efficiency, which increases the exposure probability of banks' bad loans and regional unemployment. To conceal these bad loans and unemployment, banks and local governments have to dramatically increase zombie lending. Thus, while better bankruptcy procedures are typically assumed to discourage zombie lending, we show that the introduction of SBCs may instead encourage such lending by exacerbating conflicts among creditors and political-economic frictions.

The rise of the walking dead: Zombie firms around the world

We build a comprehensive new dataset spanning listed and private nonfinancial zombie firms across Advanced Economies and Emerging Markets over the past two decades. Our findings reveal a global rise in the prevalence of these unproductive and unviable firms, particularly since the Global Financial Crisis and the Covid-19 pandemic. We show that private firms exhibit lower zombification rates due to their lower average survival rates. Our paper also offers a new perspective on zombie lending drivers: lenders may rationalize zombie lending based on overly optimistic expectations of a recovery in zombies’ future earnings. We then document that macroprudential policies targeting bank capital and loan restrictions can effectively mitigate the adverse effects of zombification. However, strengthening the banking sector alone may not suffice without robust insolvency frameworks prepared to manage firm restructuring and insolvency.

The Real Effects of Zombie Lending in Europe

‘Zombie lending’ occurs when a lender supports an otherwise insolvent borrower. Recent studies document that zombie lending has been widespread following the European sovereign debt crisis. In this paper, I develop a quantitative model to study the impact of these lending practices on firm dynamics. In the model, firm liquidations and zombie lending arise endogenously. The model provides a good match to key euro‐area firm statistics over the period 2011–14. I find that zombie lending has a substantial impact on borrowing costs, helping more low‐productivity firms to survive. This, in turn, causes a drag on aggregate output, investment and productivity.

The Elusive Nexus: Sustainable Finance and Zombie Lending–Evidence from China’s Green Credit Policy

The Elusive Nexus: Sustainable Finance and Zombie Lending–Evidence from China’s Green Credit Policy

Zombie lending, labor hoarding, and local industry growth

After the bursting of real estate bubbles in 1991, Japanese banks continued lending to unviable firms to conceal problem loans. We revisit Japan’s experience and propose a new mechanism via which banks’ loan-evergreening policy undermines allocative efficiency across industries by focusing on construction and real estate loans. Namely, banks’ continuing support for construction and real estate firms encourages labor hoarding in unviable construction projects. Since construction projects predominantly use low-skilled workers, banks’ loan-evergreening policy in these troubled sectors may depress other low-skilled industries. Based on the industry-level data in each of Japan’s 47 prefectures from 1992 to 1996, we document empirical facts consistent with this hypothesis. On average, low-skilled industries experienced disproportionately slower output and employment growth and more sluggish growth in the number of new establishments in prefectures where the share of bank loans to local construction/real estate sectors increased more after construction boom ended.

Bank Specialization and Zombie Lending

We study whether banks internalize congestion externalities when lending to zombie firms. We conjecture that banks should be better informed about the presence of zombie firms and the congestion externalities that such firms exert on healthy borrowers in industries where banks are specialized and show that banks’ credit supply to zombie firms relates negatively to their industry specialization. This relation is stronger when congestion externalities are likely to have stronger adverse effects, namely when zombie firms take a higher fraction of resources in the industry or when the industry is geographically more concentrated. Additionally, this relation is weaker in industries with higher asset specificity as zombie firms’ default (and potential asset fire sales) could reduce healthy borrowers’ collateral value. This paper was accepted by Victoria Ivashina, finance. Supplemental Material: The online appendices and data files are available at https://doi.org/10.1287/mnsc.2023.01437 .

Nonperforming Loan Disposals Without Resolution

Using proprietary data on nonperforming loan (NPL) transactions in China, we document that banks conceal NPLs in disposal transactions that are supposed to resolve NPLs. In these transactions, banks provide financing and retain the credit risks and debt collection obligations. Transaction prices contradict underlying credit risks: Despite being delinquent for 4.5 years, the median NPL package is sold at face value with zero haircut. The majority of NPL packages are resold at a premium to banks’ non–government-owned borrowers, further supporting the concealment view. Banks under stricter regulation conceal NPLs more and engage in more illicit concealment. NPL-concealing banks increase zombie lending, suggesting that an ineffective resolution exacerbates credit misallocation. Recognizing the hidden NPLs implies the total NPLs in China is two to three times the reported amount. This paper was accepted by Victoria Ivashina, finance. Funding: B. Charoenwong acknowledges financial support from the Singapore Ministry of Education [AcRF Tier 1 Research Grant A-8000760-00-00]. T. Ruan acknowledges financial support from the National University of Singapore (NUS) [Start-Up Grant A-0003870-00-00]. B. Charoenwong and T. Ruan acknowledge financial support from the NUS Business School Financial Database [Grant N-311-000-251-001]. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.02163 .

Zombie-lending during the pandemic in India: Did the Central Bank reduce credit misallocation concerns of forbearance?

During the COVID-19 pandemic, the Reserve Bank of India (RBI) undertook a policy mix approach to maintain financial stability in the Indian banking system. RBI recapitalized the banks and infused liquidity through accommodative monetary policies combined with temporary forbearance policies of restructuring loans to boost credit growth and support economic expansion. With a focus on zombie lending, we examine the effectiveness of this policy mix in bank lending channels during the pandemic. We find banks have extended credit growth to the non-financial listed firms. Broadly, we obtain little evidence of credit misallocation to these firms through zombie lending. Subsequently, we observe a decline in zombie lending to manufacturing and small and medium enterprises. However, our result shows a significant increase in zombie lending towards high rent-seeking industries. We witness that zombie lending does not crowd out healthy lending through the bank and industry congestion channels. The results of our study have significant implications for policymakers. Specifically, our findings suggest that accommodative monetary policy reduces credit misallocation concerns of forbearance. In the absence of monetary policy support, forbearance alone may exacerbate adverse effects.

The Zombie Lending Channel of Monetary Policy

The Zombie Lending Channel of Monetary Policy

The impact of COVID-19 and bank capital ratio on loan changes of ASEAN-5’s banking industry

The COVID-19 pandemic has affected economies around the world, including the banking industry, and this depends on various factors. The aim of this study is to understand the influence of COVID-19 independently and through the moderation of bank capital ratios on changes in loans of Association of Southeast Asian Nations 5 (ASEAN-5) banking industry players. The study uses a sample of 86 banking companies listed on the stock markets of Indonesia, Malaysia, the Philippines, Singapore, and Thailand from the first quarter of 2018 to the fourth quarter of 2020 by employing the panel data regression technique. The results showed that COVID-19 had a significant negative effect on changes in bank lending. However, a bank’s capital ratio was not found to play a role in moderating the effect of COVID-19 on changes in bank lending. These findings have three main implications: (i) the role of the government in recapitalization and liquidity injection can eliminate differences in behavior between banks with the classification of capital ratios; (ii) there are no signs of zombie lending in ASEAN-5’s banking industry; and (iii) regulating incentives to change bank lending behavior in future crises must take into account that bank capital categorization will not be effective. AcknowledgmentThis study was made possible with the support of a research grant by Universitas Indonesia number NKB-533/UN2.RST/HKP.05.00/2022.

Distressed firms, zombie firms and zombie lending: A taxonomy

This papers develops a taxonomy of financially distressed and zombie firms using a rich dataset that combines detailed firm-level and bank-firm level information in Spain. A distressed firm exhibits both cash-flow and balance-sheet insolvency whereas a zombie firm is a distressed company that has received new credit. We carry out several analyses to test the validity of these definitions. For instance, we document that being distressed is negatively correlated with the probability of receiving new credit. However, the main bank of a distressed firm is more reluctant to restrict the credit supply to this firm than a bank with no previous exposure to the company, which might reflect the incentives of the former to engage in loan evergreening. This financial support contributes to keep zombie firms afloat for a longer period than distressed firms. Moreover, the contraction in capital, employment and sales is much larger in distressed firms than in zombie firms.

The Zombie Lending Channel of Monetary Policy

The Zombie Lending Channel of Monetary Policy

Zombie Lending: Theoretical, International, and Historical Perspectives

This article surveys the theory on zombie lending incentives and the consequences of zombie lending for the real economy. It also offers a historical perspective by reviewing the growing empirical evidence on zombie lending along three dimensions: ( a) the role of undercapitalized banks, ( b) effects on zombie firms, and ( c) spillovers and distortions for non-zombie firms. We then provide an overview of how zombie lending can be attenuated. Finally, we use a sample of US publicly listed firms to compare various measures proposed in the literature to classify firms as “zombies.” We identify definitions of zombie firms that are adequate to investigate economic inefficiency in the form of real sector competitive distortions of zombie lending. We find that only definitions based on interest rate subsidies are able to detect these spillovers and thereby provide evidence in support of credit misallocation.

On-Site Inspecting Zombie Lending

“Zombie lending” remains a widespread practice by banks around the world. In this paper, we exploit a series of large-scale on-site inspections made on the credit portfolios of several Portuguese banks to investigate how these inspections affect banks’ future lending decisions. We find that an inspected bank becomes 20% less likely to refinance zombie firms, immediately spurring their default. Overall, banks seemingly reduce zombie lending because the incentives to hold these loans disappear once they are forced to recognize losses. This paper was accepted by Tomasz Piskorski, finance. Funding: D. Bonfim and G. Cerqueiro acknowledge financial support from Fundação para a Ciência e a Tecnologia [Grants PTDC/EGE-OGE/30314/2017 and UID/GES/00407/2013]. H. Degryse acknowledges financial support from Fonds Wetenschappelijk Onderzoek. S. Ongena acknowledges financial support from the Horizon 2020 European Research Council [Grant ERC ADG 2016 - GA 740272 lending]. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2022.4452 .

Weak Corporate Insolvency Rules: The Missing Driver of Zombie Lending

“Zombie lending”--lending to less-productive firms at subsidized rates--can help banks with misaligned incentives in the short run, but it prolongs economic downturns. We propose that inefficient resolution of insolvency is a significant contributor to this problem. We exploit variation in the efficiency of insolvency across countries to show that lack of formal bankruptcies, cheap (zombie) credit, and stickiness of existing creditors is more common in bad economic periods when insolvency works less well.

The Real Effects of Zombie Lending in Europe

'Zombie lending' occurs when a lender supports an otherwise insolvent borrower. Recent studies document that zombie lending to European firms has been widespread following the onset of the European sovereign debt crisis. This paper develops a quantitative model to study the impact of these lending practices on the dynamics and financial decisions of firms. In the model, firm liquidations and zombie lending arise endogenously. The model provides a good match to key euro-area firm statistics over the period 2011 to 2014. A key finding is that zombie lending has a substantial impact on borrowing costs, helping more low-productivity firms to survive. This, in turn, causes a drag on aggregate output, investment and productivity. These results suggest that zombie lending practices contributed to the lower output experienced by the euro area following the onset of the sovereign debt crisis.

Zombie Lending: Theoretical, International and Historical Perspectives

Zombie Lending: Theoretical, International and Historical Perspectives

Distressed Firms, Zombie Firms and Zombie Lending: A Taxonomy

Distressed Firms, Zombie Firms and Zombie Lending: A Taxonomy

Zombie Lending to U.S. Firms

Zombie Lending to U.S. Firms

Zombie Firms, Corporate Restructuring and Relationship Banking: Credit Guidance as a Key to Tackle Zombie Lending?

Abstract Economists have examined the rise of so-called zombie firms in recent years. Such firms remain in financial distress for a prolonged period while financial creditors keep them alive through continued lending. Based on signaling theory, we investigate zombie firms in the context of corporate restructuring and relationship banking. Combining a theoretical approach with a multiple case study on German medium-sized firms facing private workouts, we derive the following main propositions: (i) Banks face information asymmetry and may have incentives for loan extension (i.e., rescheduled installments and additional collateral) when deciding about restructuring financing. In the case of financing unviable restructuring strategies, this can lead to the emergence of zombie firms. (ii) For this reason and in contrast to recent research, not only weakly capitalized but also healthy banks may face such incentives and might end up in financing zombie firms. (iii) Relationship banking reduces bank information asymmetry. Thus, it may enable banks to detect clients’ distress situations in the early stages and to support resolving them. Hence, guiding and inspecting banks (i.e., credit guidance) to carry out supportive relationship banking might be a key to preventing the emergence of zombie firms. The propositions bear several implications relevant to academic research, bank management and banking regulation.