Zombie banks are banks that are practically insolvent but continue to exist through hiding bad loans on their balance sheet. This can be achieved by rolling over bad loans instead of writing them off, a process known as forbearance lending, zombie lending or evergreening. Zombie banks have received increased attention of late, not least because of the sovereign debt and banking crisis in Europe. This follows other banking crises in the US and Japan which have equally seen an increased number of bank failures, and where insolvent companies have been kept alive by banks. This study aims to give a theoretical assessment of the phenomenon around zombie banks and forbearance lending. Although zombie banks are the focus of a wide public debate, the existing research has not been able to fully explain many aspects around them, such as the several motives for forbearance lending, the impact of forbearance lending on the overall portfolio of zombie banks, or the right policy response in dealing with them. In light of this, the study presents three models that simulate the behavior of banks when rolling over bad loans. These models offer insights into the causes and effects of zombie banking, and also allow us to analyze the context of policy measures by the government and the central bank. To put the models into the right context, the study also provides a detailed overview of the theoretical and empirical literature as well as the practical experience with zombie banks and forbearance lending in Japan and Europe.

This thesis examines the effects of monetary policy shocks on the housing market. To this end, TVP-VAR model with dynamic dimension selection and stochastic volatility is estimated using monthly data for the United States over the period 1999-2017. Moreover, the model features estimating the optimal value of the Bayesian shrinkage coefficient in a time-varying manner. Since the sample covers the Zero Lower Bound period, Wu-Xia shadow rate is employed to measure the stance of monetary policy. To assess the link between housing variables and monetary policy, impulse responses and forecast error variance decompositions are provided. However, due to the time-varying nature of the model, they are estimated only for selected time periods that correspond both to the events that most likely influenced the path of macroeconomic and financial variables and to periods of low economic uncertainty. The main results are threefold. First, the model suggests that monetary policy shocks can contribute to developments in house prices. Second, the stimulative monetary policy positively affects residential investment and negatively affects mortgage rates, however, the effects are not significant due to the large confidence bands of the impulse responses. Third, higher values of the shrinkage hyperparameter are crucial for...

Zombie banks are banks that are practically insolvent but continue to exist through hiding bad loans on their balance sheet. This can be achieved by rolling over bad loans instead of writing them off, a process known as forbearance lending, zombie lending or evergreening. Zombie banks have received increased attention of late, not least because of the sovereign debt and banking crisis in Europe. This follows other banking crises in the US and Japan which have equally seen an increased number of bank failures, and where insolvent companies have been kept alive by banks. This study aims to give a theoretical assessment of the phenomenon around zombie banks and forbearance lending. Although zombie banks are the focus of a wide public debate, the existing research has not been able to fully explain many aspects around them, such as the several motives for forbearance lending, the impact of forbearance lending on the overall portfolio of zombie banks, or the right policy response in dealing with them. In light of this, the study presents three models that simulate the behavior of banks when rolling over bad loans. These models offer insights into the causes and effects of zombie banking, and also allow us to analyze the context of policy measures by the government and the central bank. To put the models into the right context, the study also provides a detailed overview of the theoretical and empirical literature as well as the practical experience with zombie banks and forbearance lending in Japan and Europe.