New article on lending responses to the COVID-19 pandemic

In a recent article published in the Journal of Banking & Finance, Özlem Dursun-de Neef (Goethe University) and her co-author Alexander Schandlbauer (University of Southern Denmark and Danish Finance Institute) explore lending responses to the COVID-19 pandemic. The authors examine how European banks adjusted their lending at the onset of the pandemic depending on their exposure to the pandemic and capitalization. 

Banks have been impacted by the pandemic crisis because their clients were faced with numerous challenges, such as mandatory shop closures, declining customer influx as well as rising competition from e-commerce platforms. Therefore, many of them were not able to repay interest on loans. Using a bank-level COVID-19 exposure measure, Özlem Dursun-de Neef and her co-author show that while banks on average decreased their loans significantly at the onset of the pandemic, worse-capitalized banks with higher exposure to the pandemic decreased their lending significantly less. Better-capitalized banks, on the other hand, decreased their lending significantly more. In addition, those better-capitalized banks experienced a larger increase in their delinquent and restructured loans. These findings are in line with the literature on “zombie lending”, which argues that worse-capitalized banks might have an incentive to issue more loans during periods of contraction to avoid loan losses and write-offs on their capital. As a final analysis, the authors document that government responses to the pandemic such as greater economic support, loosened capital requirements, and adjusted insolvency rules helped to eliminate the differences in the lending responses of worse- and better-capitalized banks.

Overall, Özlem Dursun-de Neef and her co-author Alexander Schandlbauer provide evidence for excessive lending behavior of worse-capitalized banks relative to their better-capitalized peers, which might be seen as a potential sign of zombie lending. Their results suggest that the policy measures taken by governments and central banks in response to the unprecedented pandemic were effective in eliminating the excessive lending of worse-capitalized banks. 

The article can be found here