DP11901-2 | Credit Misallocation During the European Financial Crisis

Publication Date


JEL Code(s)


Programme Area(s)



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 conclude that the contribution of banks under-capitalization to the severity of the great recession via capital misallocation was modest. This differs from previous findings that, we argue, face a serious identification problem.