Determinants of Zombie Banks in Emerging Markets and Developing Economies

IMF Working Papers, February 23, 2024

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While deeply undercapitalized banks have been shown to misallocate credit to weak firms, the drivers of such zombie banks are less researched, particularly across countries.
The authors compile a dataset of undercapitalized banks from emerging markets and developing economies.
Zombie banks are classified as:
- banks not receiving remedial treatment by owners or regulators, or
- banks remaining chronically undercapitalized.
Using logit regressions, the paper finds that country-specific factors are more influential for zombie status than bank characteristics, although some bank characteristics become significant when disaggregating by region.
The paper’s overall findings imply the need for a proper regulatory framework and an effective resolution regime to deal with zombie banks more decisively.

Dataset: undercapitalized banks from emerging markets and developing economies (compiled by the authors).
Zombie classification criteria:
- No remedial treatment by owners or regulators; or
- Chronic undercapitalization.
Empirical approach: logit regressions to identify determinants of zombie status.
Regional disaggregation: analyses repeated by region to test the significance of bank characteristics in different regions.

Country-specific factors outweigh bank-level characteristics in determining zombie status.
Some bank characteristics become statistically significant determinants when the sample is disaggregated by region.
Deep undercapitalization is associated with credit misallocation to weak firms (background premise motivating the study).

Need for a proper regulatory framework to address the emergence and persistence of zombie banks.
Need for an effective resolution regime to deal with zombie banks more decisively.