On-site Inspecting Zombie Lending

Download or read book On-site Inspecting Zombie Lending written by Diana Bonfim and published by . This book was released on 2020 with total page 29 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.