Do We Want These Two to Tango? On Zombie Firms and Stressed Banks in Europe

49 Pages Posted: 13 Oct 2017

See all articles by Manuela Storz

Manuela Storz

European Central Bank (ECB); Frankfurt School of Finance & Management gemeinnützige GmbH

Michael Koetter

Halle Institute for Economic Research

Ralph Setzer

European Central Bank (ECB)

Andreas Westphal

European Central Bank (ECB)

Date Written: October 11, 2017

Abstract

We show that the speed and type of corporate deleveraging depends on the interaction between corporate and financial sector health. Based on granular bank-firm data pertaining to small and medium-sized enterprises (SME) from five stressed and two non-stressed euro area economies, we show that “zombie” firms generally continued to lever up during the 2010–2014 period. Whereas relationships with stressed banks reduce SME leverage on average, we also show that zombie firms that are tied to weak banks in euro area periphery countries increase their indebtedness even further. Sustainable economic recovery therefore requires both: deleveraging of banks and firms.

Keywords: Zombie lending, debt overhang, bank stress

JEL Classification: E44, G21, G32

Suggested Citation

Storz, Manuela and Koetter, Michael and Setzer, Ralph and Westphal, Andreas, Do We Want These Two to Tango? On Zombie Firms and Stressed Banks in Europe (October 11, 2017). ECB Working Paper No. 2104, Available at SSRN: https://ssrn.com/abstract=3052072

Manuela Storz (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Frankfurt School of Finance & Management gemeinnützige GmbH ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

Michael Koetter

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

HOME PAGE: http://www.iwh-halle.de/en/about-the-iwh/people/detail/michael-koetter/

Ralph Setzer

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Andreas Westphal

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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