However, they will subsequently also grant fewer new loans. This means that funding remains with less productive firms instead of being channelled towards more innovative firms. The situation in Japan should serve as a warning in this respect.3 Weak banks therefore tend to foster weak firms – and the attendant inefficient distribution of funding will dampen an economy’s innovativeness and dynamism.
Studies by the OECD4 confirm that a non-negligible percentage of firms can be classified as “zombie firms". For instance, in 2013 28% of capital resources in Greece, 19% in Italy and 16% in Spain were sunk in firms that were unable to cover their cost of capital.