On-Site Inspecting Zombie Lending

67 Pages Posted: 27 Feb 2020 Last revised: 11 Nov 2021

See all articles by Diana Bonfim

Diana Bonfim

Banco de Portugal; Catholic University of Portugal (UCP) - Catolica Lisbon School of Business and Economics

Geraldo Cerqueiro

Catolica-Lisbon SBE

Hans Degryse

KU Leuven - Faculty of Business and Economics (FEB)

Steven Ongena

University of Zurich - Department Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: January 1, 2020

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. Overall, banks seemingly reduce zombie lending because the incentives to hold these loans disappear once they are forced to recognize losses.

Keywords: zombie lending, bank supervision

JEL Classification: G21, G32

Suggested Citation

Bonfim, Diana and Cerqueiro, Geraldo and Degryse, Hans and Ongena, Steven R. G., On-Site Inspecting Zombie Lending (January 1, 2020). Swiss Finance Institute Research Paper No. 20-16, Available at SSRN: https://ssrn.com/abstract=3530574 or http://dx.doi.org/10.2139/ssrn.3530574

Diana Bonfim (Contact Author)

Banco de Portugal ( email )

Av Almirante Reis, 71
P-1150-012 Lisboa
Portugal

Catholic University of Portugal (UCP) - Catolica Lisbon School of Business and Economics ( email )

Palma de Cima
Lisbon, 1649-023
Portugal

Geraldo Cerqueiro

Catolica-Lisbon SBE ( email )

Palma de Cima
Lisbon, 1649-023
Portugal

Hans Degryse

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Steven R. G. Ongena

University of Zurich - Department Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

NTNU Business School ( email )

Norway

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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