Network-Motivated Lending Decisions: A Rationale for Forbearance Lending
Research Institute of Economy, Trade and Industry Discussion Paper Series 15E057
44 Pages Posted: 11 Aug 2016 Last revised: 17 Oct 2019
Date Written: October 17, 2019
We demonstrate theoretically and empirically the presence of forbearance lending by profit-maximizing banks to influential buyers in a supply network. If the financial market is concentrated, then banks can internalize the negative externality of an influential firm's exit. As a result, they may keep refinancing for a loss-making influential firm at an interest rate lower than the prime rate. This mechanism sheds new light on the discussion about bailouts offered to zombie firms. Our empirical study, with a unique dataset containing information about interfirm relationships and main banks, provides evidence for such network-motivated lending decisions.
Keywords: supply network, influence coefficient, forbearance, bailout, zombie
JEL Classification: C55, D57, G21, G32, L13, L14
Suggested Citation: Suggested Citation