Credit Misallocation During the European Financial Crisis

Do banks with low capital extend excessive credit to weak rms, and does this
matter for aggregate eciency? Using a unique data set that covers almost all
bank- rm relationships in Italy in the period 2004-2013, we nd that, during the
Eurozone nancial crisis: (i) Under-capitalized banks were less likely to cut credit
to non-viable rms. (ii) Credit misallocation increased the failure rate of healthy
rms and reduced the failure rate of non viable rms. (iii) Nevertheless, the adverse
e ects of credit misallocation on the growth rate of healthier rms were negligible,
and so were the e ects on TFP dispersion. This goes against previous in
uential
ndings that, we argue, face serious identi cation problems. Thus, while banks
with low capital can be an important source of aggregate ineciency in the long
run, their contribution to the severity of the great recession via capital misallocation
was modest.