This document summarizes discussions from a conference on weak productivity and the role of financial factors and policies. It discusses four academic papers and their findings. The first paper finds that restricted credit availability due to the financial crisis led to increased business failure, especially for highly leveraged firms. The second paper finds that weak banks and high firm leverage reduced investment, and this effect was stronger for firms linked to weak banks with high rollover risk. The third paper finds that loose monetary policy increased productivity growth by alleviating credit constraints, while quantitative easing reduced productivity growth. The document then discusses insights from research on Portugal, including definitions of weak banks, mechanisms like the link between weak banks and zombie firms, non-linear effects of leverage on investment

1. Ministry of Finance – Portugal
Session 3. Financial Policies, financial systems
and productivity
Discussion
BIS – IMF – OECD Joint Conference
Weak productivity: The role of financial factors and policies
10-11 January 2018
Ana Fontoura Gouveia
GPEARI – PT Ministry of Finance / Nova School of Business and Economics
The views are those of the presenter and not necessarily those of the institutions

2. Distressed banks, distressed decisions?
Anderson, Riley and Young
• UK firm-level data (smaller underrepresented), 2002-
2012, banking relationships
• Exit probabilities
Results
• Financial crisis  Restricted credit availability
increased business failure
• Attachment to weak banks affects more the highly
leveraged firms
• Forbearance? Even for the same leverage, “unnatural
selection”, where more productive may leave

3. Debt overhang, rollover risk and corporate investment
Kalemli-Ozcan, Laeven, Moreno
• Firm-level data, bank-level data, 8 European countries,
2000-2012
• Investment growth
Results
• Weak bank and leverage reduce investment
• Leverage more negative if firms linked to weak banks
• Evergreening? Firms attached to weak banks and with
higher rollover risk decreased their investment more

4. Monetary policy, factor allocation and growth
(Banergee, Kharroubi and Zampolli)
• Industry level data; 2000-2015; 15 countries
• Resource allocation
Results
• Looser monetary policy – alleviates credit constraints –
effects on productive v. unproductive firms
– Conventional monpol – steeper slope yield curve - increases
aggregate productivity growth
– QE – flatter slope yield curve - reduces aggregate productivity
growth
• Stronger effects for labour reallocation (v. capital)

5. Granular data
• EU KLEMS
• ORBIS/AMADEUS
• Bankscope
• Kompass
• FAME
• ECB sovereign exposures
• IBSI

6. Some insights from research on Portugal

7. 1. Weak bank definition
• State support (Anderson, Riley and Young)
– Sample selection? E.g. BES collapse in Portugal. Beck et al (2017)
find most exposed banks decreased credit supply but firms able to
compensate with other sources of funding, including new lending
with banks with which they had no relation – exceptional times -
limited impact on credit –better firms?
• Exposure to sovereigns (Kalemli-Ozcan, Laeven and Moreno)
– In itself a measure of bank weakness? Exposure to sovereign risk
periphery
Others?
• Principal Component Analysis: Capital, NPLs, ROAA, retail funding, Z-
score, net income, net interest income (Andrews and Petroulakis,
2017)
• CDS variation around shock (Duval, Hong and Timmer)
• Directly measure firms’ access to credit? (e.g. SAFE)

8. 2. Mechanisms at play?
The link with zombie firms
Variable Unit Zombie Non-zombie p-value*
Total Workers unit 23,36 15,74 0.000
Turnover 103
€ 3183,45 1987,17 0.000
Operating Length years 23,93 21,86 0.000
Labor Productivity € 3,57 11,58 0.000
Tangible Assets 103
€ 1418,83 578,54 0.000
N 111 609 834 204
Access to finance by zombies?
• Higher tangible assets – collateral; More workers – support
to avoid losses; Older – longer banking relationships
…but much less productive
Osterhold and Gouveia (forthcoming): PT good case study due to large number of
zombies in the past + one of the largest improvements in insolvency framework more
recently + database covering all firms

9. 3. Non-linearities and heterogeneity:
leverage and investment
• Non-linear effects
– Martins, Gonçalves and Duque (forthcoming): positive effects of
increased leverage up to the percentile 82.
– González and Martínez-Carrascal (2017): Debt ratio detrimental
for investment for firms with high levels of debt (above 75
percentile), even more negative during crisis (2008-2012).
• Firm dimension
– Impact of leverage on investment heterogeneous across firm
dimension (Farinha and Prego, 2013).

10. 3. Non-linearities and heterogeneity:
leverage and investment
Figure 1. Investment by sector (2008=100) Figure 2. Credit to NFC (2009=100)
Source: INE (Forecast based on Investment
Survey and Ministry of Economy
Source: Bank of Portugal and GPEARI
• Investment developments different across sectors (e.g. real estate, utilities)
• Threshold for leverage sectoral specific (Martins, Gonçalves and Duque)
• Zombie share very different in different sectors (Osterhold and Gouveia)
 Sectoral estimates with firm level data

11. 4. Investment – Debt - Savings
Figure 1 – Evolution of financing sources of NFC (% of GDP)
Source: National Accounts, Statistics Portugal
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Net lending (-) /net borrowing (+) Gross savings Gross fixed capital formation
Firm level data papers stop in 2012 – fundamental change?

12. 4. Investment – Debt - Savings
• Firm-level data confirms relevance of firms’ savings in supporting
investment (Banco de Portugal, 2017a).
• Not specific to Portugal. NFC savings increased in large number of
countries, alongside increases in profits (Chen et al., 2017).
• Structural change? Profitability not relevant in past recovers. But it is
now. (González and Martínez-Carrascal, 2017)
Important asymmetries (Banco de Portugal, 2017b).
• In some firms, savings are financing investment (no increase in firms’
leverage).
• Firms that have larger increases in investment experience a rise in
their debt ratios.
• Some other firms have been retaining earnings in order to deleverage.

13. Back to the papers
Weak banks, credit constraints & high leverage (in a context of
weak demand and high uncertainty):
– Slow exit of the least productive
– Hindered resource reallocation
– Lower investment
– Evergreening? Mixed evidence
Role for public policy?

14. Role for public policy?
• QE – even if some negative effects on reallocation (further
evidence needed), what is the counterfactual? Lower AD,
less credit to good firms, lower employment (hysteresis)…
• Fiscal policy – scope?
• Structural reforms
– Mix of policies – address bank weaknesses + insolvency frameworks (we
know what to do after OECD work
– Zombies. Can resources be reallocated? (uncertain. HK via education;
what about K?)
– Policy complementarities (e.g. zombies high share of employment 
ALMP)
• Change banks’ incentives. Credit based on productivity.
Public policy? E.g. Credit guarantees (Rodrigues et al, 2016; Farinha
and Felix, forthcoming)

15. Obrigada!
ana.gouveia@gpeari.min-financas.pt