DP11901 Credit Misallocation During the European Financial Crisis

Author(s): Fabiano Schivardi, Enrico Sette, Guido Tabellini
Publication Date: March 2017
Date Revised: October 2019
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: 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; In areas-sectors with more low-capital banks, zombies are more likely to survive; Nevertheless, bank under-capitalization does not hurt the growth rate of healthy firms. We conclude that the contribution of banks under-capitalization to the severity of the great recession via capital misallocation was modest. This differs from previous findings that, we argue, face a serious identification problem.