On-site inspecting zombie lending

Diana Bonfim, Geraldo Cerqueiro, Hans Degryse, Steven R. G. Ongena

Research output: Working paperPreprint

Abstract

In spite of growing regulatory pressure in most developed economies, “zombie lending” remains a widespread practice by banks. 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.
Original languageEnglish
Number of pages67
DOIs
Publication statusPublished - 27 Feb 2020

Publication series

NameSwiss Finance Institute Research Paper
No.20-16

Keywords

  • Zombie lending
  • Bank supervision

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