Network-Motivated Forbearance Lending

This paper develops a theoretical framework for network-motivated forbearance lending, or forbearance lending to influential buyers and sellers in a supply network. Because dominant banks in a financial market internalize the negative externality of an influential firm’s exit, they may continue to refinance a loss-making influential firm at an interest rate lower than the prime rate. This type of forbearance lending is distinct from other strategies such as evergreening or gambling for resurrection, and we show that network-motivated forbearance lending is independent of the financial soundness of the bank and can be welfare improving. To evaluate the extent of the externality of an influential seller or buyer, we propose two measures: the price influence coefficient and the demand influence coefficient, respectively. This paper was accepted by Agostino Capponi, finance. Funding: This work was supported by the Seimeikai Foundation; the Seoul National University Institute of Economic Research, Housing and Commercial Bank Economic Research Fund; the Nomura Foundation; and the Japan Society for the Promotion of Science [Grants 15K01217, 16K13367, 17K03818, 20K20511, 23243050, 26245037, 26590051]. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2023.00459 .