DP14754 On-site inspecting zombie lending

Author(s): Diana Bonfim, Geraldo Cerqueiro, Hans Degryse, Steven Ongena
Publication Date: May 2020
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Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14754

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.