Forbearance Lending as a Crisis Management Tool: Evidence from Japan
Can Loan Forbearance Save Struggling Businesses Without Creating “Zombies”?
New research from the Bank of England suggests that forbearance programs, which allow struggling businesses to temporarily pause debt payments, can be an effective tool for economic recovery, particularly when paired with restructuring plans.
The study, “Forbearance Lending as a Crisis Management Tool: Evidence from Japan,” examines the impact of Japan’s SME Financing Facilitation Act, which encouraged banks to offer forbearance to small and medium-sized enterprises (SMEs) facing financial distress.
Using a combination of difference-in-differences analysis and counterfactual exercises, the researchers found that forbearance lending, when coupled with restructuring plans, can provide a temporary boost to economic output without leading to widespread “zombification” of the corporate sector.
“Zombification” refers to the phenomenon where struggling businesses are kept afloat artificially, hindering economic growth and innovation.the study’s authors, Isabelle roland, Yukiko Saito, and Philip Schnattinger, argue that forbearance is most effective when credit market disruptions prevent the efficient reallocation of capital. In such situations, forbearance can provide struggling businesses with the breathing room they need to restructure and become viable again.
This research offers valuable insights for policymakers grappling with the economic fallout of crises like the global financial crisis and the COVID-19 pandemic. While forbearance programs have been criticized for potentially propping up unviable businesses, this study suggests that they can be a valuable tool for supporting economic recovery when implemented strategically.
[Image: A graph illustrating the impact of forbearance lending on SME output]
The full research paper, “Forbearance Lending as a Crisis Management Tool: evidence from Japan,” is available for download on the Bank of England website.
Can Loan Forbearance Save Businesses Without Creating “Zombies”?
Interviewer: With economies around the world feeling the strain of recent crises, policymakers are constantly seeking effective recovery tools. Today, we have with us Isabelle Roland, one of the authors of a new Bank of England study, “Forbearance Lending as a Crisis management Tool: evidence from Japan.” Isabelle,thanks for joining us.
Isabelle Roland: My pleasure.
Interviewer: Your study examines the impact of Japan’s SME Financing Facilitation Act, which encouraged forbearance for struggling businesses. Can you explain what forbearance is in this context, and what your findings were?
Isabelle Roland: Certainly. Forbearance allows businesses facing temporary difficulties to pause or reduce debt payments. Our research, using data from Japan, found that forbearance, when coupled with restructuring plans, can indeed provide a much-needed boost to economic output without leading to a widespread problem of “zombification,” which is the fear that businesses are kept artificially afloat, suppressing growth and innovation.
Interviewer: That’s encouraging. What makes forbearance effective in these situations?
Isabelle Roland: It’s most effective when credit markets are disrupted, making it harder for capital to flow to where it’s needed most. Forbearance buys struggling businesses time to restructure, become viable again, and avoid simply collapsing, which would be more harmful in the long run.
Interviewer: The study suggests that forbearance can be a valuable tool for policymakers, but are there any potential pitfalls?
Isabelle roland: It’s crucial that forbearance is implemented strategically. Without proper restructuring plans, it could just delay the inevitable failure of unviable businesses. This can ultimately harm the economy more than it helps.
Interviewer: Isabelle, thank you for providing such valuable insights into this complex issue. Your research offers policymakers a smarter approach to economic recovery, one that balances short-term relief with long-term sustainability.