## Determinants of Zombie Banks in Emerging Markets and Developing Economies

_IMF Working Papers, February 23, 2024_

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**Canonical URL:** [Determinants of Zombie Banks in Emerging Markets and Developing Economies](https://www.imf.org/en/publications/wp/issues/2024/02/23/determinants-of-zombie-banks-in-emerging-markets-and-developing-economies-545110)

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## Bibliographic details
- Authors: Torsten Wezel, Hannah Sheldon, Zhengwei Fu
- Published: February 23, 2024
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400267888.001

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### Summary
- 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.

### Methods and classification
- 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.

### Key findings
- 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).

### Policy implications and recommendations
- 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.

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_Source: https://www.imf.org/en/publications/wp/issues/2024/02/23/determinants-of-zombie-banks-in-emerging-markets-and-developing-economies-545110_