Working Paper: CEPR ID: DP14754
Authors: Diana Bonfim; Geraldo Cerqueiro; Hans Degryse; Steven Ongena
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. However, banks change their lending decisions only in the inspected sectors. Overall, banks seemingly reduce zombie lending because the incentives to hold these loans disappear once they are forced to recognize losses.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| onsite inspections (L74) | changes in lending behavior (G21) |
| inspections (Y20) | refinancing of zombie firms (G32) |
| refinanced firms by inspected banks (G21) | likelihood of default (G33) |
| forced recognition of losses (G33) | incentives for banks to maintain zombie loans (G21) |