Bank credit allocation and productivity: stylized facts for Portugal

Long-term economic growth largely depends on the ability to channel resources to more productive firms, enabling them to invest and expand. Banks play a prominent role in resource allocation, especially in economies, such as the Portuguese one, which are heavily reliant on bank lending. The degree of efficiency in the allocation of bank credit can thus have major consequences for a country’s economic growth.

This paper tries to shed light on two related questions. First, how credit granted by the Portuguese banking system is allocated across firms, taking into account their different levels of productivity. Second, whether changes in the credit stock respond positively to firm productivity, thus inducing credit reallocation towards more productive firms, and how that response is affected by the existing credit allocation.

The paper finds evidence of substantial misallocation of bank loans between 2008 and 2016. During this period, the share of outstanding credit granted to firms with very low productivity (measured or inferred) was always substantial, peaking at 44% in 2013. This share declined afterwards with the rebound in economic activity and the growing allocation of new loans towards lower-risk firms and away from higher-risk firms (see figure). Credit misallocation was particularly high in construction and real estate but not confined to these sectors.

Credit reallocation depends on the existing stock of credit. The responsiveness of credit growth to firm productivity is much lower in sectors with relatively more misallocated credit and in banks that have a high share of such credit in their portfolios.

Click here to go to the paper by Nuno Azevedo, Márcio Mateus, and Álvaro Pina.