DP10963 On Zombie Banks and Recessions after Systemic Banking Crises

Author(s): Timotej Homar, Sweder van Wijnbergen
Publication Date: November 2015
Keyword(s): bank recapitalization, economic recovery, financial crises, intervention, regulatory forbearance, zombie banks
JEL(s): E44, E58, G21, G28
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=10963

What costs do zombie banks impose on society? We analyze the effects of government and central bank interventions in 68 systemic banking crises since 1980, of which 28 are part of the recent global financial crisis. Our estimation approach controls for the correlation between intervention measures and the time-invariant component of unobservable crisis severity. We find that timely bank recapitalizations substantially reduce the duration of recessions, underscoring the distortions caused by zombie banks and the costs of regulatory forbearance.