COVID-19 and Lending Responses of European Banks

71 Pages Posted: 28 Aug 2020 Last revised: 14 Jun 2021

Date Written: March 24, 2021

Abstract

This paper examines how European banks adjusted lending at the onset of the pandemic depending on their local exposure to the COVID-19 outbreak and capitalization. Using a bank-level COVID-19 exposure measure, we show that higher exposure to COVID-19 led to a relative increase in worse-capitalized banks' loans whereas their better-capitalized peers decreased their lending more. At the same time, only better-capitalized banks experienced a significantly larger increase in their delinquent and restructured loans. These findings are in line with the zombie lending literature that banks with low capital have an incentive to issue more loans during contraction times to help their weaker borrowers so that they can avoid loan loss recognition and write-offs on their capital.

Keywords: COVID-19; Bank lending; Europe; Bank capitalization; Zombie lending

JEL Classification: G21, E51

Suggested Citation

Dursun-de Neef, H. Özlem and Schandlbauer, Alexander, COVID-19 and Lending Responses of European Banks (March 24, 2021). Available at SSRN: https://ssrn.com/abstract=3681937 or http://dx.doi.org/10.2139/ssrn.3681937

H. Özlem Dursun-de Neef (Contact Author)

Goethe University Frankfurt ( email )

House of Finance, Campus Westend
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Frankfurt am Main 60629
Germany

HOME PAGE: http://sites.google.com/site/oezlemdursundeneef/

Alexander Schandlbauer

University of Southern Denmark ( email )

Campusvej 55
Odense, 5230
Denmark

HOME PAGE: http://sites.google.com/site/alexanderschandlbauer/

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