Network-motivated Lending Decisions: A Rationale for Forbearance

Yoshiaki Ogura, Ryo Okui and Yukiko Saito

Working Paper Series from Institute of Economic Research, Seoul National University

Abstract: We demonstrate theoretically and empirically the presence of forbearance lending by profit maximizing banks to influential buyers in a supply network. If the financial market is concentrated, then banks can internalize the negative externality of an influential firm¡¯s exit. As a result, they may keep refinancing for a loss-making influential firm at an interest rate lower than the prime rate. This mechanism sheds new light on the discussion about bailouts offered to zombie firms. Our empirical study, with a unique dataset containing information about interfirm relationships and main banks, provides evidence for such network-motivated lending decisions.

Keywords: supply network; influence coefficient; forbearance; bailout; zombie (search for similar items in EconPapers)
JEL-codes: C55 D57 G21 G32 L13 L14 (search for similar items in EconPapers)
Date: 2019-10
New Economics Papers: this item is included in nep-ban, nep-bec and nep-com
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Persistent link: https://EconPapers.repec.org/RePEc:snu:ioerwp:no127

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