Zombie Prevalence and Bank Health: Exploring Feedback Effects

Clemens Possing, Andreea Rotarescu and Kyungchul Song
Additional contact information
Clemens Possing: University of Waterloo
Andreea Rotarescu: Wake Forest University, Department of Economics
Kyungchul Song: University of British Columbia

No 130, Working Papers from Wake Forest University, Economics Department

Abstract: This paper investigates feedback effects between bank health and zombie firms—financially distressed firms receiving subsidized credit. The literature focuses on how banks create zombies, overlooking zombies’ impact on bank health. Using Spanish firm-bank data (2005-2014), we document a vicious cycle: lower bank capital ratios are associated with higher zombie activity in served industries, while higher zombie prevalence is associated with reduced bank capital. We link this to a previously unexplored mechanism where banks respond appropriately to observable financial distress through higher provisioning, but overlook risks from relationship borrowers receiving subsidized rates. Our findings suggest that this feedback stems not from financial distress alone, but from the combination of distress with interest rate subsidies.

Keywords: Zombie Lending; Bank-Firm-Industry Feedback; Capital Misallocation; Networks; Cross-Sectional Dependence (search for similar items in EconPapers)
JEL-codes: C23 E44 G21 G32 (search for similar items in EconPapers)
Pages: 70
Date: 2025-08
References: Add references at CitEc
Citations:

Downloads: (external link)
https://drive.google.com/file/d/1U743yiuaO5rnydu8W ... Mv9/view?usp=sharing

Related works:
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:ris:wfuewp:021682

Access Statistics for this paper

More papers in Working Papers from Wake Forest University, Economics Department Contact information at EDIRC.
Bibliographic data for series maintained by Don Shegog ().