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Credit Misallocation During the European Financial Crisis

Fabiano Schivardi (), Enrico Sette and Guido Tabellini

No 11901, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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.

Keywords: Bank capitalization; capital misallocation; zombie lending (search for similar items in EconPapers)
JEL-codes: D23 E24 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-eff and nep-mac
Date: 2017-03
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Working Paper: Credit Misallocation During the European Financial Crisis (2017) Downloads
Working Paper: Credit Misallocation During the European Financial Crisis (2017) Downloads
Working Paper: Credit Misallocation During the European Financial Crisis (2017) Downloads
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