Credit Misallocation During the European Financial Crisis

Abstract

Using data on bank-firm relationships in Italy during the Eurozone financial crisis, we show that: (i) compared to healthy banks, under-capitalized banks cut credit to healthy but not to zombie firms and are more likely to prolong a credit relationship with a zombie; (ii) in areas-sectors with more low-capital banks, zombies are more likely to survive; (iii) nevertheless, bank under-capitalization does not hurt the growth rate of healthy firms. We provide evidence that extending credit to the weakest firms during the recession mitigated the disruption of supply chains and adverse local demand externalities.

Who Funds Zombie Firms: Banks or Non-banks?

“…More recent empirical papers, e.g. Schivardi et al (2021) and Bonfim et al (2022), provide support for the role of weak banks in the euro area. Schivardi et al (2021), in using Italian data for the period 2004-2013, find that undercapitalised banks were less likely to cut credit to non-viable firms.…”

“…Storz et al 2017 andPeek andRosengren 2005 1 ) as way to avoid prolonged weakness in long-run growth or by addressing the procyclicality of capital requirements (e.g. Schivardi et al 2021) to reduce banks' incentives to forbear on non-performing loans during downturns may not be particularly effective. In addition, calls for policy action under e.g.…”

A prolonged period of low interest rates in Europe: Unintended consequences

“…Other complementary reasons for the rise of zombie firms include banks' forbearance, banks' weakness, and badly designed insolvency regimes and policy initiatives making it impossible to restructure. Many zombie firms have been found to be linked to weak, undercapitalized, or stressed banks that extend lending to zombie firms to avoid the recognition of nonperforming loans and to meet capital requirements (Acharya et al., 2020; Andrews & Petroulakis, 2019; Caballero et al., 2008; Schivardi et al., 2017; Storz et al., 2017). A vicious cycle of low interest rates, weak banks, and zombie firms is thus created, pushing firms' markups and prices further down.…”

The Role of Zombie Firms in Industrial Sustainable Development: Evidence From Yangtze River Delta Urban Agglomerations

“…Regulatory forbearance may also give opportunities to weak banks, which in turn may lead to the emergence of zombie firms (Okamura, 2011). That is to say, under-capitalized banks do not have to worry too much about being penalized by the authorities for the bad loans, thus they prefer to roll over loans to inefficient firms (Storz et al, 2017;Schivardi et al, 2022). Subsidization programs enacted by the government may also serve as a breeding ground for zombie firms.…”