COVID-19 and European Banks
41 Pages Posted: 28 Aug 2020 Last revised: 14 Oct 2020
Date Written: October 14, 2020
This paper shows how European banks responded to the initial COVID-19 outbreak by focusing on bank capital. Using a bank-level COVID-19 exposure measure, we show that higher exposure to COVID-19 led to an increase in worse-capitalized banks' lending whereas their better-capitalized peers decreased their lending. At the same time, only better-capitalized banks experienced an 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 increase their lending during contraction times to help their weaker borrowers so that they can avoid loan losses and write-offs on their capital.
Keywords: COVID-19; Bank lending; Europe; Bank capitalization; Zombie lending
JEL Classification: G21, E51
Suggested Citation: Suggested Citation