Collateral value, firm borrowing, and forbearance lending: an empirical study of Taiwan

This paper investigates whether banks exercise forbearance lending to troubled firms by presenting a stylized model and then testing the hypotheses implied by this model, using firm-level data of Taiwan. During 1991-1996 when the economy started to show signs of weakening, banks are found to have exercised forbearance lending across all types of firms, hoping that the economy would soon recover to salvage those ailing firms. During 1997-2001 when the recession went even deeper, banks were found no longer to forbear loans. This period saw a more rapid decline in property prices, which coincided with a wave of asset liquidation during this period.