The initial information is that banks are performing these roles only to a limited degree. Signals are mixed on how vigorously governments want banks to pursue bankruptcy proceedings. With little opportunity to recover funds, banks are accepting even dubious restructuring programs from enterprises. But banks, except under government directive, are avoiding making new loans to loss-making enterprises. Together with a cut in fiscal subsidies, this is imposing a harder budget constraint on the enterprises.
Nonviable enterprises seem more likely to starve to death than to die through execution.
Corporate restructuring is not a normal part of commercial banking. In fact, banks are under attack for being excessively conservative. Enterprise restructuring is taking place in Central and Eastern Europe driven by the disintegration of regional trade relations, sharply higher input prices, falling domestic demand, inflation, and other economic dislocations in combination with the harder budget constraint. Thus far the restructuring has been more downsizing than making new investments. Return to Working Papers homepage.