Unearthing Zombies

The Unholy Trinity: Regulatory Forbearance, Stressed Banks and Zombie Firms

“…In fact, subsequent efforts to correct for the zombie lending such as the bankruptcy law in 2016 had limited success in exacting banks to recognize non-performing loans (Kulkarni et al, 2020) and regulatory intervention efforts were, at best, partially effective. This paper shows that the sticky match between stressed banks and impaired firms persists even after forbearance is withdrawn.…”

“…As economies recover and forbearance policies are withdrawn, active regulatory intervention may be needed to correct for the prevalence of zombie lending (Kulkarni et al, 2020;Bonfim et al, 2020). While insufficient recapitalization can perversely increase zombie lending, a perverse match between stressed banks and zombie firms may impact the effectiveness of future policy interventions.…”

The Zombie Lending Channel of Monetary Policy

“…(i) the low-interest rate environment, which characterized most of the period over the last two decades, would imply banks charging zero or even negative interest rates to zombie firms, which seems unlikely (Kulkarni et al 2021, Banerjee andHofmann 2022); and (ii) while it is plausible that banks may offer lower interest rates to zombies than what banks' credit risk models would suggest (based on zombies' balance sheets), it is still likely that banks would charge higher interest rates than those offered to high-rated firms (Kulkarni et al 2021, Faria-e-Castro et al 2022. We refer the reader to Albuquerque and Iyer (2023) for a longer discussion.…”

“…We investigate the role that banks' capital buffers, NPLs, macroprudential policies, and insolvency regimes may have in mitigating the differential effect of zombies' financial performance relative to nonzombies in the aftermath of an increase in borrowing costs. The literature has found that stronger banks (Storz et al 2017, Acharya et al 2019, Andrews and Petroulakis 2019, Albuquerque and Iyer 2023, Blattner et al 2023, tighter macroprudential policies (Albuquerque and Iyer 2023), and well-prepared insolvency regimes (Andrews and Petroulakis 2019, Kulkarni et al 2021, Becker and Ivashina 2022 help to tackle zombification. In this section we expand this literature by also investigating if zombie lending can be mitigated by these policies when interest rates increase.…”

South Asia Economic Focus, Spring 2020 : The Cursed Blessing of Public Banks

“…This may be especially important for public banks, in which incentives are stronger to evergreen bad loans. In India, an overhaul of the bankruptcy code resulted in only a modest increase in the reporting of bad loans, while a regulatory intervention removing lender discretion in bad loan recognition had a sizable effect -but public banks were significantly less likely than private ones to report "zombies" even after these interventions (Kulkarni et al 2019).…”