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Credit Misallocation During the European Financial Crisis

Listed author(s):
  • Schivardi, Fabiano

    (LUISS School of European Political Economy)

  • Sette, Enrico

    (Bank of Italy)

  • Tabellini, Guido

    (Bocconi University)

Do banks with low capital extend excessive credit to weak firms, and does this matter for aggregate efficiency? Using a unique data set that covers almost all bank-firm relationships in Italy in the period 2004-2013, we find that, during the Eurozone financial crisis: (i) Under-capitalized 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. (iii) Nevertheless, the adverse effects of credit misallocation on the growth rate of healthier firms were negligible, and so were the effects on TFP dispersion. This goes against previous influential findings that, 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.

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Paper provided by LUISS School of European Political Economy in its series SEP Working Papers with number 2017/3.

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Length: 66 pages
Date of creation: 10 Mar 2017
Handle: RePEc:ris:sepewp:2017_003
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