Giovanni Favara, Camelia Minoiu, and Ander Perez-Orive
Working Paper 2024-7
August 2024
Abstract:
We show that U.S. banks do not engage in zombie lending to firms of deteriorating profitability, irrespective of capital levels and exposure to such firms. In contrast, unregulated financial intermediaries do, originating more and cheaper loans to these firms. We establish these results using supervisory data on firm-bank relationships, syndicated lending data for banks and nonbanks, and an empirical setting with quasi-random shocks to firm profitability. Although credit migrates from banks to nonbanks, zombie firms file for bankruptcy at an elevated rate, suggesting that nonbanks’ zombie lending does not enhance the survival rate of distressed and unprofitable firms.
JEL classification: G21, G32, G33
Key words: zombie lending, zombie firms, banks, nonbanks
https://doi.org/10.29338/wp2024-07
Giovanni Favara and Ander Perez-Orive are with the Federal Reserve Board. Camelia Miniou is with the Federal Reserve Bank of Atlanta. The authors thank Viral Acharya (discussant), Diana Bonfim (discussant), Anton Braun, Mark Jensen, John Kandrac, Artashes Karapetyan (discussant), Mico Loretan, Xu Lu, Indrajit Mitra, Veronika Penciakova, Sam Rosen, Leslie Shen Sheng (discussant), Dominik Supera, Edison Yu (discussant), Larry Wall, Jialan Wang, Tao Zha, and participants at the Federal Reserve System Credit Risk Conference, Fischer-Shain Center for Financial Services inaugural conference at Temple University, SFA Annual Meeting, Federal Reserve Day-ahead Conference on Financial Markets and Institutions, AEA meetings, IBEFA summer meetings, XIII Workshop on Institutions, Individual Behavior, and Economic Outcomes, and seminar participants at the International Monetary Fund, European Central Bank, Atlanta Fed, and Swiss National Bank for useful discussions and comments. Quinn Danielson, Yuritzy Ramos, and Makena Schwinn provided excellent research assistance. They are grateful to Tom Heintjes and David Jenkins for editorial suggestions. The views and conclusions are those of the authors and do not indicate concurrence by the Federal Reserve Bank of Atlanta, the Federal Reserve System, or their staff. Any remaining errors are the authors' responsibility.
Please address questions regarding content to Giovanni Favara, Federal Reserve Board; Camelia Minoiu, Federal Reserve Bank of Atlanta; or Ander Perez-Orive, Federal Reserve Board.
To receive e-mail notifications about new papers, subscribe. Under "Publications" select "Working Papers."