Credit supply and zombie firms’ survival
In this paper Masashige Hamano, Philip Schnattinger, Mototsugu Shintani, Iichiro Uesugi, and Francesco Zanetti develop a search and matching model to analyze the relationship between credit market conditions and zombie firms (unprofitable companies sustained through external borrowing). The methodology comprises both theoretical modeling and empirical testing:
Theoretical framework
- Creates a two-period model with search frictions between banks and firms in credit markets
- Incorporates search costs and opportunity costs that influence lending decisions to low-productivity firms
- Models how credit market tightness (ratio of loan supply to demand) affects the formation and termination of credit relationships
- Uses Nash bargaining to determine interest rates and profit-sharing between banks and firms
Empirical analysis
- Data: Industry-level data across 31 industries in Japan (2000-2019) using multiple sources including Nikkei Financial Quest, Bank of Japan surveys, and productivity databases
- Zombie firm identification: Uses Caballero et al. (2008) criterion based on interest rates charged relative to high-quality borrowers
- Credit market tightness measures: Constructs theory-consistent indices from difference between loan supply and demand using Bank of Japan surveys
Findings
- Inverted U-shaped relationship: The share of zombie firms first increases then decreases with credit market tightness, forming an inverted U-shape
- Dual mechanisms at work:
– Low tightness: Banks maintain relationships with unprofitable firms to avoid search costs, increasing zombie share
– High tightness: Firms can easily find alternative lenders, encouraging exit from unprofitable relationships, decreasing zombie share - Bargaining power effects: Industries with higher firm bargaining power show reduced zombie shares, particularly when credit markets are tight
- Quantitative impact
– A one standard deviation increase in credit market tightness increases zombie ratios by approximately 3.5 percentage points when tightness is below the threshold
– The same increase decreases zombie shares by about 10 percentage points when tightness exceeds the threshold
Credit Market Tightness and Zombie Firms: Theory and Evidence
Authors: Masashige Hamano, Philip Schnattinger, Mototsugu Shintani, Iichiro Uesugi, Francesco Zanetti
From: Waseda University, Bank of England, University of Tokyo, Hitotsubashi University, University of Oxford
Regulated banks vs. shadow lenders: who keeps zombie firms alive?
This research by Giovanni Favara, Camelia Minoiu, and Ander Perez-Orive challenges the conventional wisdom from studies of Japanese and European zombie lending, demonstrating that well-capitalized, regulated U.S. banks do not engage in this practice. Instead, it reveals a more nuanced story where regulatory arbitrage leads to credit migration to unregulated sectors, but the efficient U.S. insolvency system limits the real economic distortions typically associated with zombie lending. The authors use Federal Reserve Y-14 supervisory data covering commercial and industrial loans from large U.S. banks (2012-2017), Refinitiv DealScan syndicated loan data for both banks and nonbank financial intermediaries (NBFIs), as well as firm balance sheet information and bankruptcy filing records.
Favara et al. exploit the 2014-2015 oil price shock as a quasi-random shock to firm profitability, using a triple difference-in-differences design and the following zombie firm definitions, namely (1) Balance-sheet approach (high leverage, low interest coverage ratio, negative sales growth), and (2) Credit-subsidy approach (speculative-grade rating plus subsidized credit rates).
Findings
- U.S. banks do not engage in zombie lending
– Banks reduce loan exposures to distressed firms by 13.4% after they become zombie candidates
– Banks charge higher interest rates (24 basis points premium) to these firms
– This behavior is consistent across all bank capital levels and exposure levels
– Low-capital, high-exposure banks actually tighten terms more aggressively than other banks - Nonbank financial intermediaries fill the gap
– NBFIs are 8% more likely to grant new loans to zombie candidate firms compared to banks
– NBFIs charge significantly lower spreads (140-234 basis points lower) to zombie firms than banks
– Nonbank lending shares increase by 31-33% in syndicated deals involving zombie candidate firms
– Credit migration from banks to NBFIs appears linked to bank capital regulation post-2014 - Limited real economic impact
– Despite NBFI support, zombie firms file for bankruptcy at twice the rate of other distressed firms
– The share of zombie firms in the U.S. remains low (2-6.5% annually), well below other countries
– Efficient U.S. bankruptcy system may reduce incentives for zombie lending - Regulatory implications
– U.S. capital regulation does not create perverse incentives for banks to evergreen loans
– Bank capital requirements may promote credit migration to less regulated institutions
– However, this migration has limited macroeconomic spillovers due to higher zombie firm bankruptcy rates
Zombie Lending to U.S. Firms
Authors: Giovanni Favara, Camelia Minoiu, Ander Perez-Orive
From: Federal Reserve Board, Federal Reserve Bank of Atlanta
