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Credit Misallocation During the European Financial Crisis

Author

Listed:
  • Fabiano Schivardi

    (Università LUISS "Guido Carli")

  • Enrico Sette

    (Banca d'Italia)

  • Guido Tabellini

    (Università Bocconi)

Abstract

Do banks with low capital extend excessive credit to weak firms, and does this matter for aggregate eciency? Using a unique data set that covers almost all bank-firm relationships in Italy in the period 2008-2013, we find that, during the Eurozone financial crisis: (i) Under-capitalized banks cut credit to healthy firms (but not to zombie firms) and are more likely to prolong a credit relationship with a zombie firm, compared to stronger banks. (ii) In areas-sectors with more low-capital banks, zombie firms are more likely to survive and non-zombies are more likely to go bankrupt; (iii) Nevertheless, bank under-capitalization does not hurt the growth rate of healthy firms, while it allows zombie firms to grow faster. This goes against previous in uential findings that, we argue, face a serious identification problem. Thus, while banks with low capital can be an important source of aggregate ineffciency 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, 2018. "Credit Misallocation During the European Financial Crisis," Working Papers LuissLab 18139, Dipartimento di Economia e Finanza, LUISS Guido Carli.
  • Handle: RePEc:lui:lleewp:18139
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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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