Credit Misallocation During the European Financial Crisis
67 Pages Posted: 18 Apr 2017
Date Written: March 22, 2017
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 areassectors 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.
Keywords: bank capitalization, zombie lending, capital misallocation
JEL Classification: D230, E240, G210
Suggested Citation: Suggested Citation