On-site inspecting zombie lending

Diana Bonfim; Geraldo Cerqueiro; Hans Degryse; Steven Ongena

doi:10.1287/mnsc.2022.4452

On-site inspecting zombie lending

Diana Bonfim^*, Geraldo Cerqueiro^*, Hans Degryse^*, Steven Ongena^*

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

18 Citations (Scopus)

9 Downloads

Abstract

"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.

Original language	English
Pages (from-to)	2547-2567
Number of pages	21
Journal	Management Science
Volume	69
Issue number	5
DOIs	https://doi.org/10.1287/mnsc.2022.4452
Publication status	Published - May 2023

Keywords

Banking supervision
On-site inspection
Zombie lending

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

Access to Document

10.1287/mnsc.2022.4452

58626989Accepted author manuscript, 475 KBLicence: Unspecified

http://hdl.handle.net/10400.14/40951Licence: Unspecified

Cite this

@article{54fc53fa1be14767a07475bfd0a3e2e8,

title = "On-site inspecting zombie lending",

abstract = "{"}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.",

keywords = "Banking supervision, On-site inspection, Zombie lending",

author = "Diana Bonfim and Geraldo Cerqueiro and Hans Degryse and Steven Ongena",

note = "Funding Information: Funding: D. Bonfim and G. Cerqueiro acknowledge financial support from Fundac¸{\~a}o para a Ci{\^e}ncia e a Tecnologia [Grants PTDC/EGE-OGE/30314/2017 and UID/GES/00407/2013]. H. Degryse acknowl-edges 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]. Funding Information: The Portuguese Government signed in May of 2011 a financial assistance program with the International Monetary Fund, the European Commission, and the European Central Bank. At that time, several European countries, including Spain and Ireland, were dealing with extensive crises in their banking sectors. For this reason, the national supervisory authority (Banco de Portugal) was called to implement a program of special on-site inspections to assess the health of the banking sector in Portugal. Publisher Copyright: Copyright: {\textcopyright} 2022 INFORMS.",

year = "2023",

month = may,

doi = "10.1287/mnsc.2022.4452",

language = "English",

volume = "69",

pages = "2547--2567",

journal = "Management Science",

issn = "0025-1909",

publisher = "INFORMS Institute for Operations Research and the Management Sciences",

number = "5",

}

TY - JOUR

T1 - On-site inspecting zombie lending

AU - Bonfim, Diana

AU - Cerqueiro, Geraldo

AU - Degryse, Hans

AU - Ongena, Steven

N1 - Funding Information: Funding: D. Bonfim and G. Cerqueiro acknowledge financial support from Fundac¸ão para a Ciência e a Tecnologia [Grants PTDC/EGE-OGE/30314/2017 and UID/GES/00407/2013]. H. Degryse acknowl-edges 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]. Funding Information: The Portuguese Government signed in May of 2011 a financial assistance program with the International Monetary Fund, the European Commission, and the European Central Bank. At that time, several European countries, including Spain and Ireland, were dealing with extensive crises in their banking sectors. For this reason, the national supervisory authority (Banco de Portugal) was called to implement a program of special on-site inspections to assess the health of the banking sector in Portugal. Publisher Copyright: Copyright: © 2022 INFORMS.

PY - 2023/5

Y1 - 2023/5

N2 - "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.

AB - "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.

KW - Banking supervision

KW - On-site inspection

KW - Zombie lending

UR - http://www.scopus.com/inward/record.url?scp=85161316282&partnerID=8YFLogxK

U2 - 10.1287/mnsc.2022.4452

DO - 10.1287/mnsc.2022.4452

M3 - Article

SN - 0025-1909

VL - 69

SP - 2547

EP - 2567

JO - Management Science

JF - Management Science

IS - 5

ER -

On-site inspecting zombie lending

Abstract

Keywords

UN SDGs

Access to Document

Other files and links

Fingerprint

CUBE: Católica Lisbon Research Unit in Business and Economics