VOX  CEPR Policy Portal

There is a widespread perception that under-capitalised banks can prolong crises by misallocating credit to weaker firms and restraining credit to healthy borrowers. This column explores the extent and consequences of credit misallocation in Italy during and after the Eurozone Crisis. Bank undercapitalisation may have been costly in terms of misallocation of capital and productive efficiency in the medium term due to the higher exit of healthy firms, but it had at best a limited role in aggravating the recession induced by the Eurozone Crisis.