On-Site Inspecting Zombie Lending
53 Pages Posted: 27 Feb 2020 Last revised: 7 Jul 2020
Date Written: January 1, 2020
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.
Keywords: zombie lending, bank supervision
JEL Classification: G21, G32
Suggested Citation: Suggested Citation