Evergreening

Miguel Faria-e-Castro, Pascal Paul and Juan Sanchez

No 2022-14, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: We develop a simple model of relationship lending where lenders have incentives for evergreening loans by offering better terms to less productive and more indebted firms. We detect such lending behavior using loan-level supervisory data for the United States. Low-capitalized banks systematically distort firms’ risk assessments to window-dress their balance sheets. To avoid further reductions in their capital ratios, such banks extend relatively more credit to underreported borrowers. We incorporate the theoretical mechanism into a dynamic heterogeneous-firm model to show that evergreening affects aggregate outcomes, resulting in lower interest rates, higher levels of debt, and lower productivity.

Keywords: evergreening; zombie firms; bank lending; misallocation (search for similar items in EconPapers)
Pages: 70
Date: 2022-07-31
New Economics Papers: this item is included in nep-ban and nep-dge
Note: First version: October 2021
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.frbsf.org/wp-content/uploads/sites/4/wp2022-14.pdf Full text - article PDF (application/pdf)

Related works:
Journal Article: Evergreening (2024)
Working Paper: Evergreening (2023)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedfwp:94569

Ordering information: This working paper can be ordered from
reference.library@sf.frb.org

DOI: 10.24148/wp2022-14

Access Statistics for this paper

More papers in Working Paper Series from Federal Reserve Bank of San Francisco Contact information at EDIRC.
Bibliographic data for series maintained by Federal Reserve Bank of San Francisco Research Library (reference.library@sf.frb.org).