DP11901 Credit Misallocation During the European Financial Crisis

Author(s):	Fabiano Schivardi, Enrico Sette, Guido Tabellini
Publication Date:	March 2017
Date Revised:	November 2020
Keyword(s):	Bank capitalization, capital misallocation, zombie lending
JEL(s):	D23, E24, G21
Programme Areas:	Financial Economics, Industrial Organization
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=11901

Using data on bank-firm relationships in Italy during the Eurozone financial crisis, we show that: (i) compared to healthy banks, under-capitalized banks cut credit to healthy but not to zombie firms and are more likely to prolong a credit relationship with a zombie; (ii)\ in areas-sectors with more low-capital banks, zombies are more likely to survive; (iii) nevertheless, bank under-capitalization does not hurt the growth rate of healthy firms. We provide evidence that extending credit to the weakest firms during the recession mitigated the disruption of supply chains and adverse local demand externalities.