This paper highlights the dual facets of bank specialization. After negative industry-specific shocks, banks specializing in an affected sector act as shock absorbers by increasing their lending to firms in that sector at lower interest rates than non-specialized banks. This lending is to profitable firms, thus not consistent with zombie lending. However, when there are funding constraints, increased lending to the affected sector by specialized banks is accompanied by a simultaneous cut in lending ...
This paper highlights the dual facets of bank specialization. After negative industry-specific shocks, banks specializing in an affected sector act as shock absorbers by increasing their lending to firms in that sector at lower interest rates than non-specialized banks. This lending is to profitable firms, thus not consistent with zombie lending. However, when there are funding constraints, increased lending to the affected sector by specialized banks is accompanied by a simultaneous cut in lending to unrelated sectors, thereby transmitting the shock. These firms compensate by raising funds externally. However, in tight financing conditions, there are negative real effects.
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