Zombie Firms, Corporate Restructuring and Relationship Banking: Credit Guidance as a Key to Tackle Zombie Lending?

Economists have examined the rise of so-called zombie firms in recent years. Such firms remain in financial distress for a prolonged period while financial creditors keep them alive through continued lending. Based on signaling theory, we investigate zombie firms in the context of corporate restructuring and relationship banking. Combining a theoretical approach with a multiple case study on German medium-sized firms facing private workouts, we derive the following main propositions: (i) Banks face information asymmetry and may have incentives for loan extension (i.e., rescheduled installments and additional collateral) when deciding about restructuring financing. In the case of financing unviable restructuring strategies, this can lead to the emergence of zombie firms. (ii) For this reason and in contrast to recent research, not only weakly capitalized but also healthy banks may face such incentives and might end up in financing zombie firms. (iii) Relationship banking reduces bank information asymmetry. Thus, it may enable banks to detect clients’ distress situations in the early stages and to support resolving them. Hence, guiding and inspecting banks (i.e., credit guidance) to carry out supportive relationship banking might be a key to preventing the emergence of zombie firms. The propositions bear several implications relevant to academic research, bank management and banking regulation.

An analysis of the SME–bank match made in heaven: the case of New Zealand main banks and their relationship-managed SMEs

Purpose The purpose of this paper is to answer the increasing calls to analyse how lending relationship between banks and their small- and medium-sized enterprises (SMEs) work. More precisely, the main aim is to investigate the lending approach(es) and criteria used by banks to assess loan applications from their relationship-managed (RM) SMEs’ clients. Other objectives include investigating the level of congruence in terms of lending practices and processes among the sample banks in New Zealand (NZ) and to discern how the assessment of the SME owner/manager is done within the relationship-banking framework. Design/methodology/approach The research objectives concern investigating processes and not variances. Thus, a qualitative research approach was used. Extensive data was collected via interviews across representative banks in NZ and thematic analysis was used to analyse the data. Findings The findings include a detailed analysis of how relationship banking actually works; how in NZ, the main bank brands use three criteria of lending (financials, security and character) as a framework of assessing loan applications from RM-clients – which is different from the character, capital, capacity, conditions, and collateral (5Cs) that are widely used and discussed as the framework of lending; and an elucidation as to why and how character assessment is different from the other criteria of lending. Originality/value To the best of authors’ knowledge, this is the first study to investigate the mechanisms and processes that banks use to deal with their RM-SMEs, show the existence of a different framework of lending other than the 5Cs and attempt an explanation as to why character evaluation is different from that of the other criteria of lending.

The performance generating limitations of the relationship-banking model in the digital era – effects of customers' trust, satisfaction, and loyalty on client-level performance

PurposeThis paper investigates the viability of the relationship-oriented business model. Specifically, it examines the effects of bank customers' satisfaction, loyalty, and trust in bank advisors on two client-level performance measures; client-level non-interest revenue, and client-level revenue on net interest spread. It further investigates how effects are moderated by differences in clients' risk tolerance and financial literacy.Design/methodology/approachThe findings are based on analyses of a data set that combines survey data (collected from 13,525 bank clients in 2013) with bank record data from each respondent. The cross sectional data is analyzed using OLS-regression and structural equation modeling.FindingsOverall, the findings are that the relationship banking model generates non-interest revenue, but not revenue on net interest spread. In more detail, findings show that trust has a positive direct effect on client-level non-interest revenue. Furthermore, trust mediates the entire effect of satisfaction and loyalty on client-level non-interest revenue. Customer satisfaction and loyalty do not lead to enhanced client-level non-interest revenue if there is little trust in bank advisors. Findings further show that the relevance of trust for non-interest revenue is higher for clients with high risk tolerance and high financial literacy. Satisfaction, loyalty, and trust have no effect, however, on client-level revenue on net interest spread.Originality/valueWhile previous literature mainly has used subjective intentions (e.g., repurchase behavior) as operationalization of performance, this paper combines subjective survey data and objective performance data, allowing the investigation of how the customer relationship model affects actual performance. Furthermore, the paper investigates the relational banking model's effect on non-interest and net interest spread revenue, and we show that the relational banking model generates only non-interest revenue, and not net interest spread revenue. The fine-grained client-level data also allows the investigation on how the effect of trust on client-level performance differs among client groups with different cognitive characteristics (i.e., risk tolerance and financial literacy).