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The real effects of zombie lending in Europe

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  • Tracey, Belinda

    (Bank of England)

Abstract

'Zombie lending' occurs when a lender supports an otherwise insolvent borrower. Recent studies document that zombie lending to European firms has been widespread following the onset of the European sovereign debt crisis. This paper develops a quantitative model to study the impact of these lending practices on the dynamics and financial decisions of firms. In the model, firm liquidations and zombie lending arise endogenously. The model provides a good match to key euro-area firm statistics over the period 2011 to 2014. A key finding is that zombie lending has a substantial impact on borrowing costs, helping more low-productivity firms to survive. This, in turn, causes a drag on aggregate output, investment and productivity. These results suggest that zombie lending practices contributed to the lower output experienced by the euro area following the onset of the sovereign debt crisis.

Suggested Citation

  • Tracey, Belinda, 2019. "The real effects of zombie lending in Europe," Bank of England working papers 783, Bank of England, revised 27 May 2021.
    • Handle: RePEc:boe:boeewp:0783
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Faria-e-Castro, Miguel & Paul, Pascal & Sánchez, Juan M., 2024. "Evergreening," Journal of Financial Economics, Elsevier, vol. 153(C).
      • Miguel Faria-e-Castro & Pascal Paul & Juan M. Sanchez, 2021. "Evergreening," Working Papers 2021-012, Federal Reserve Bank of St. Louis, revised Aug 2023.
      • Miguel Faria-e-Castro & Pascal Paul & Juan M. Sanchez, 2022. "Evergreening," Working Paper Series 2022-14, Federal Reserve Bank of San Francisco.
    2. Hartwig, Benny & Lieberknecht, Philipp, 2020. "Monetary policy, firm exit and productivity," Discussion Papers 61/2020, Deutsche Bundesbank.
    3. Kaehny, Maximilian & Herweg, Fabian, 2022. "Do Zombies Rise When Interest Rates Fall? A Relationship-Banking Model," VfS Annual Conference 2022 (Basel): Big Data in Economics 264126, Verein für Socialpolitik / German Economic Association.
    4. Kin Wai Cheung & Masami Imai, 2023. "Zombie Lending, Labor Hoarding, and Local Industry Growth," Wesleyan Economics Working Papers 2023-003, Wesleyan University, Department of Economics.
    5. Choudhary, M. Ali & Jain, Anil K., 2021. "Corporate stress and bank nonperforming loans: Evidence from Pakistan," Journal of Banking & Finance, Elsevier, vol. 133(C).
    6. Vladimir Asriyan & Luc Laeven & Alberto Martin & Alejandro Van der Ghote & Victoria Vanasco, 2021. "Falling Interest Rates and Credit Misallocation: Lessons from General Equilibrium," Working Papers 1268, Barcelona School of Economics.
    7. Vladimir Asriyan & Luc Laeven & Alberto Martin & Alejandro Van der Ghote & Victoria Vanasco, 2021. "Falling interest rates and credit reallocation: Lessons from general equilibrium," Economics Working Papers 1784, Department of Economics and Business, Universitat Pompeu Fabra, revised Jun 2022.
    8. Luc Laeven & Glenn Schepens & Isabel Schnabel, 2020. "Zombification in Europe in times of pandemic," ECONtribute Policy Brief Series 011, University of Bonn and University of Cologne, Germany.
    9. Kotone Yamada & Yukio Minoura & Jouchi Nakajima & Tomoyuki Yagi, 2023. "Corporate Finance Facility and Resource Allocation: Research Trends and Developments during the Spread of COVID-19," Bank of Japan Working Paper Series 23-E-1, Bank of Japan.
    10. Fabian Herweg & Maximilian Kähny, 2022. "Do Zombies Rise when Interest Rates Fall? A Relationship Banking Model," CESifo Working Paper Series 9628, CESifo.

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    More about this item

    Keywords

    Zombie lending; forbearance lending; zombie firms; firm defaults; firm dynamics;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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