The cleansing effect of banking crises

Abstract

The responsibility for discussion papers lies solely with the individual authors. The views expressed herein do not necessarily represent those of IWH. The papers represent preliminary work and are circulated to encourage discussion with the authors. Citation of the discussion papers should account for their provisional character; a revised version may be available directly from the authors.Comments and suggestions on the methods and results presented are welcome.IWH Discussion Papers are indexed in RePEc-EconPapers and in ECONIS.

The Unholy Trinity: Regulatory Forbearance, Stressed Banks and Zombie Firms

“…16 Our paper corroborates the growing concern that zombie firms may be holding back growth in a number of countries, including Japan (Caballero, Hoshi, and Kashyap, 2008), and Europe (Acharya et al, 2019;Gopinath et al, 2017). Blattner, Farinha, and Rebelo (2019) examine the relationship between weak banks and low productivity growth following the European sovereign debt crisis while Gropp et al (2020) focus on the productivity impact of distressed bank recapitalization through TARP during the global financial crisis. 17 Banerjee and Hofmann (2018) and Caballero, Hoshi, and Kashyap (2008) show that zombie-firm presence lowers investment and employment in more productive firms.…”

“…To address the endogeneity concern that greater forbearance is more likely for firms and by extension to banks that are expected to recover quickly, we turn to an alternative identification strategy using proximity to the regulator, the RBI. Consistent with Gropp et al (2020), we use proximity to the regulator as a proxy for the influence that the banks can exert on the regulator. Further, since forbearance schemes are implicitly backed by the government, pressures to forbear may be further concentrated in state-owned banks.…”

“…To address potential endogeneity issues surrounding forbearance provision, we turn to an alternate identification strategy. Gropp et al (2020) examine the impact of forbearance in the US in the aftermath of the GFC using the distance to the regulator, the Federal Deposit Insurance Corporation (FDIC), in Washington as an instrument for forbearance. We follow their strategy of and instrument for forbearance using the 'distance to the RBI.…”

Kicking the Can Down the Road: Government Interventions in the European Banking Sector

“…In addition to most of the previous literature, we also investigate the implications of (regulatory) forbearance. Gropp et al (2017), for example, show that regulatory forbearance in the U.S. -due to the Federal Deposit Insurance Corporation's (FDIC) decision not to let banks fail -affects growth and employment in some regions; we show that a sovereign's debt overhang can significantly impede an undercapitalized banking sector's recovery after a financial crisis, especially its financial stability, credit supply and risk-taking incentives.…”

News from the Frontier: Increased Productivity Dispersion across Firms and Factor Reallocation

“…productivity growth. Using data on about 260 US metropolitan statistical areas (MSA) over the period 2007-2014, Gropp et al (2018) show that higher financial constraints have increased cleansing mechanisms and job destruction with a positive impact on MSA average productivity growth. Aghion et al (2019) show, on a large dataset of French firms, that two channels linking financial development and economic growth are in fact at work.…”