Low firm productivity: the role of finance and the implications for financial stability

Desislava Andreeva, Vasco Botelho, Alessandro Ferrante, Lucyna Gόrnicka and Francesca Lenoci

Financial Stability Review, 2024, vol. 2

Abstract: Productivity growth in the euro area has been declining for several decades. In light of the importance of bank lending as a source of external funding for euro area firms, this special feature investigates the link between firm productivity and bank credit allocation. Bank credit in the euro area has been skewed towards sectors that have contributed only marginally to aggregate productivity growth, such as real estate. Additionally, bank loans tilted towards less-productive firms within the same sectors during the COVID-19 pandemic, supported by state credit guarantees. Banks with weaker balance sheets lent more to less-productive firms during this period than other banks did. The tilt towards less-productive firms could have an indirect effect on aggregate productivity if the survival of less-productive firms suppresses the profitability of more-productive competitors, discouraging market entry and investment. A more diversified external funding structure could help boost the productivity of euro area firms, to the benefit of financial stability. JEL Classification: D24, E22, E44, G21

Keywords: access to finance; bank credit; capital markets; COVID-19; firm productivity; government guarantees (search for similar items in EconPapers)
Date: 2024-11
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