Despite progress towards a banking union in the EU, European banks continue to be confronted with a highly divergent application of insolvency laws. A recent survey of European banks conducted by the European Banking Authority (2020) shows that this divergence has given rise to widely varying loan resolution outcomes. To eliminate the variation in the application of insolvency laws, the European Commission (2022) has recently proposed a directive that aims to harmonise insolvency law in the EU.
Inefficient loan resolution regimes can promote the creation of zombie firms that continue to receive credit from banks despite being insolvent, since such regimes may enhance incentives for banks to evergreen loans to weak firms to prevent the re…
Read the full article at: https://cepr.org/voxeu/columns/insulating-properties-inefficient-loan-enforcement-european-firms