Work

Evergreening

Year: 2022

Type: article

Abstract: We develop a simple model of concentrated lending where lenders have incentives for evergreening loans by offering better terms to firms that are close to default. We detect such lending behavior using loan-level supervisory data for the United States. Banks that own a larger share of a firm’s debt provide distressed firms with relatively more credit at lower interest rates. Building on this empirical validation, we incorporate the theoretical mechanism into a dynamic heterogeneous-firm model to show that evergreening affects aggregate outcomes, resulting in lower interest rates, higher levels of debt, and lower productivity.

Source: Federal Reserve Bank of San Francisco, Working Paper Series

DOI: 10.24148/wp2022-14

Authors: Federal Reserve Bank of St. Louis, Miguel Faria-e-Castro, Pascal Paul, Federal Reserve Bank of San Francisco, Juan M. Sánchez, Federal Reserve Bank of St. Louis

Institutions: Goethe University Frankfurt, Pennsylvania State University, University of Zurich, Norges Bank, Banco Central de Chile, McGill University, Banco de Portugal, London Business School, Federal Reserve Bank of St. Louis, University of California, Berkeley, KU Leuven

Language: English

Topic: Banking stability, regulation, efficiency

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: bronze

OpenAlex ID: W4289794209

FWCI: 1.857

Cites: 80

Cited by: 16

Related to: 10