Abstract:

On July 26, 2012 the ECB’s president Mario Draghi announced to do “whatever it takes” to preserve the Euro and subsequently launched the Outright Monetary Transactions (OMT) Program, which led to a significant increase in the value of sovereign bonds issued by European periphery countries. As a result, the OMT announcement indirectly recapitalized periphery country banks due to their significant holdings of these bonds. However, the regained stability of the European banking sector has not fully transferred into economic growth.We show that this development can at least partially be explained by zombie lending motives of banks that still remained under-capitalized after the OMT announcement. While banks that benefited from the announcementincreased their overall loan supply, this supply was mostly targeted towards low-quality firms with pre-existing lending relationships with these banks. As a result, there was no positive impact on real economic activity like employment or investment. Instead, these firms mainly used the newly acquired funds to build up cash reserves. Finally, we document that creditworthy firms in industries with a prevalence of zombie firms suffered significantly from the credit misallocation, which slowed down the economic recovery.

About the Speaker:

Dr.Viral Acharya is C.V. Starr Professor of Economics, Department of Finance, at the New York University Stern School of Business, New York, USA. He is also the Director of the NSE-NYU Stern Initiative on the Studyof Indian Capital Markets. He is also a Research Associate in Corporate Finance, National Bureau of Economic Research (NBER), Research Affiliate, Centre for Economic Policy Research (CEPR), and Research Associate,European Corporate Governance Institute (ECGI). He is a distinguished alumnus of IIT Bombay.His resume is available at http://pages.stern.nyu.edu/~sternfin/vacharya/