When Zombie Firms Become a Worry, Revise Bankruptcy Laws

Publication Date
Financial Markets Group Special Papers SP 262
Publication Authors

Bankruptcies have fallen sharply in OECD economies during 2020 and the first half of 2021 because of an array of COVID-related support available to businesses, as well as imposed moratoria on bankruptcy filings. Keeping insolvent firms alive drains resources from the healthy parts of the economy. However, public financing for ailing firms will not last long, and a surge in corporate failures is likely in many countries. These failures may be attenuated if governments introduce restructuring plan features in their bankruptcy laws. So far, several OECD countries have reformed bankruptcy, while efforts at the EU level to spur insolvency reform remain weak.