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Forbearance lending as a crisis management tool: evidence from Japan

Author

Listed:
  • Roland, Isabelle

    (Bank of England)

  • Saito, Yukiko

    (Waseda University)

  • Schnattinger, Philip

    (Bank of England)

Abstract
Credit market interventions have become a widespread policy tool deployed by governments around the world to support their corporate sectors following shocks like the global financial crisis and the pandemic. Among those policies, forbearance programmes allowed firms to temporarily stop making payments on certain debt obligations or obtain debt forgiveness. However, the impact of these policies is not fully understood. In particular, forbearance lending is generally believed to keep unviable firms alive and contribute to the zombification of the corporate sector. To inform this debate, we examine the effects of Japan’s small and medium-sized enterprise (SME) Financing Facilitation Act, which encouraged banks to offer loan forbearance to troubled SMEs. We develop a framework to quantify the aggregate impact of the policy using a difference-in-differences approach combined with back‑of‑the‑envelope counterfactual exercises. Our evaluation indicates that, when coupled with business restructuring plans, forbearance lending can temporarily boost output without contributing to the widespread zombification of the corporate sector. Forbearance is more effective when credit market disruptions impede the reallocation of capital.

Suggested Citation

  • Roland, Isabelle & Saito, Yukiko & Schnattinger, Philip, 2024. "Forbearance lending as a crisis management tool: evidence from Japan," Bank of England working papers 1102, Bank of England.
    • Handle: RePEc:boe:boeewp:1102
    as

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    References listed on IDEAS

    as
    1. Joe Peek & Eric S. Rosengren, 2005. "Unnatural Selection: Perverse Incentives and the Misallocation of Credit in Japan," American Economic Review, American Economic Association, vol. 95(4), pages 1144-1166, September.
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    More about this item

    Keywords

    Forbearance lending; zombie firms; credit frictions; misallocation; productivity; search and matching; credit market interventions; policy evaluation;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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