Evergreening

Author(s): Miguel Faria-e-Castro, Pascal Paul, and Juan M. Sánchez

We develop a simple model of relationship lending where lenders have incentives for evergreening loans by offering better terms to firms that are close to default. We detect such lending behavior using loan-level supervisory data for the United States. Banks that own a larger share of a firm’s debt provide distressed firms with relatively more credit at lower interest rates. Building on this empirical validation, we incorporate the theoretical mechanism into a dynamic heterogeneous-firm model to show that evergreening affects aggregate outcomes, resulting in lower interest rates, higher levels of debt, and lower productivity.

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Article Citation

Faria-e-Castro, Miguel, Pascal Paul, and Juan M. Sánchez. 2023. "Evergreening," Federal Reserve Bank of San Francisco Working Paper 2022-14. Available at https://doi.org/10.24148/wp2022-14