Study Reveals Link Between Zombie Firms and Weak Banks

A new study from the Organisation for Economic Co-operation and Development (OECD) has found evidence of a link between the prevalence of “zombie firms” and weaknesses in the banking system and insolvency regimes. 

Zombie firms are companies that have persistent problems meeting their interest payments and would typically exit or be forced to restructure in a competitive market.

According to the OECD, the prevalence and productive resources sunk in zombie firms have risen since the mid-2000s in a number of OECD countries. It says these firms represent a drag on productivity growth as they congest markets and divert credit, investment and skills from to more productive and successful firms.

New OECD indicators suggest that there is scope to improve the design of insolvency regimes to accelerate the restructuring or exit of weak firms and therefore revive productivity growth, and the organisation highlights that insolvency reforms have already been carried out in a number of countries, which are likely to partly achieve some of these gains.

Zombie firms are more likely to be connected to weak banks, says the study, suggesting that zombie congestion partly stems from bank forbearance i.e. the tendency for weak banks to bet on the resurrection of failing firms. This underscores the importance of a more aggressive policy to resolve non-performing loans, accompanied by complementary reforms to insolvency regimes.

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