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Credit misallocation during the European financial crisis

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  • Fabiano Schivardi
  • Enrico Sette
  • Guido Tabellini

Abstract

Do banks with low capital extend excessive credit to weak firms, and does this matter for aggregate efficiency? Using a unique dataset that covers almost all bank-firm relationships in Italy in the period 2004-2013, we find that during the Eurozone financial crisis (i) undercapitalized banks were less likely to cut credit to non-viable firms; (ii) credit misallocation increased the failure rate of healthy firms and reduced the failure rate of non-viable firms and (iii) nevertheless, the adverse effects of credit misallocation on the growth rate of healthier firms were negligible, as were the effects on TFP dispersion. This goes against previous influential findings, which, we argue, face serious identification problems. Thus, while banks with low capital can be an important source of aggregate inefficiency in the long run, their contribution to the severity of the great recession via capital misallocation was modest.

Suggested Citation

  • Fabiano Schivardi & Enrico Sette & Guido Tabellini, 2017. "Credit misallocation during the European financial crisis," BIS Working Papers 669, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:669
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    More about this item

    Keywords

    bank capitalization; zombie lending; capital misallocation;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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