Discussion paper
DP11901 Credit Misallocation During the European Financial Crisis
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.
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