The Political Economy of Bank Lending

This study investigates the existence of political rents in bank lending, using a comprehensive loan-level data set of the universe of commercial loans in Mexico from 2003 to 2012. Identification relies on changes in the state of origin of a senate committee chairman as a source of exogenous variation in firms' political relationship. The study finds that banks offer favorable loan terms to politically connected firms with larger loan quantities, lower loan spreads, longer maturities, and lower collateral requirements. Furthermore, political loans exhibit higher default rates. To isolate the bank supply channel, a rich set of fixed-effects is included with various specifications. The favorable lending increases with the strength of a firm's political connection, varies gradually along the political cycle, and is mainly offered by large and domestic banks. Consistent with the quid pro quo hypothesis, the study finds that banks that extend political loans receive significantly more government borrowings with better credit quality. The study also shows that the greater credit supply due to political connection leads to a large and significant increase in firm-level employment and assets. The study provides estimates of the total social cost of political lending and net revenue for banks that are engaged in rent provision activity. Finally, a series of robustness tests are performed to rule out alternative mechanisms and explanations.

Bibliographic Details

Main Authors:	Agarwal, Sumit, Morais, Bernardo, Ruiz, Claudia, Zhang, Jian
Format:	Working Paper biblioteca
Language:	English en_US
Published:	World Bank, Washington, DC 2016-02
Subjects:	EMPLOYMENT, MONETARY POLICY, BORROWER, BASIS POINTS, INTEREST INCOME, GOVERNMENT BANK, INDIVIDUAL LOANS, CHECKS, ACCOUNTING, INTEREST RATE SPREAD, SMALL BANKS, BANKING INDUSTRY, INFORMATION SYSTEM, LOAN PERFORMANCE, INTEREST, LAWS, DUMMY VARIABLES, LOAN MARKET, CREDIT AVAILABILITY, PRIVATIZATION, INDUSTRY, INTEREST RATE, EXCHANGE, STRATEGIES, RESOURCE ALLOCATION, LIQUIDITY, SERVICES, DEVELOPING COUNTRIES, DEBTOR, GOVERNMENT BORROWING, PUBLIC SERVICES, POLITICAL ECONOMY, DEFAULT PROBABILITY, HOUSING, REVENUES, POSITIVE COEFFICIENT, MORTGAGE, LOAN SPREADS, LOAN, ASYMMETRIC INFORMATION, BUDGET CONSTRAINTS, RENEGOTIATION, PROJECTS, PROBABILITY OF DEFAULT, BORROWERS, TAX, NON-PERFORMING LOANS, TREATIES, DUMMY VARIABLE, SAVING, RESERVE, BANKRUPTCY, LOAN CONTRACT, BENEFICIARIES, INTERNATIONAL BANK, SOFT BUDGET CONSTRAINTS, LENDER, INSTRUMENTS, BUDGET, BANK LENDING, TERMS OF CREDIT, MATURITY, SMALL BUSINESS, CAPITAL ALLOCATION, SAVINGS, CREDIT WORTHINESS, COLLATERAL REQUIREMENT, TELECOMMUNICATIONS, MORAL HAZARD, COMMERCIAL BANK, BANK PRIVATIZATION, TRANSPORT, CONSUMER CREDIT, FINANCIAL STUDIES, PORTFOLIOS, DEBTS, CONTRACTS, FINANCES, PRIVATE BANKS, TRADING, PRODUCTIVITY, OPTIONS, LENDING DECISIONS, EMERGING MARKET, DOMESTIC BANKS, MARKETS, DEBT, RETURN, LEGISLATION, LOAN MATURITY, BUSINESS CYCLE, GOVERNMENT BORROWINGS, BANK LIQUIDITY, INTERNATIONAL ECONOMICS, BASIS POINT, SOFT BUDGET CONSTRAINT, LOANS, LABOR, PUBLIC SECTOR BANKS, INVESTMENT OPPORTUNITIES, ENTERPRISES, SMALL BORROWERS, FINANCE, LOAN TERMS, TAXES, BANKING SECTOR, BANK BALANCE SHEET, BAILOUT, BANKS, TRANSACTIONS, MACROECONOMIC ENVIRONMENT, BUDGET CONSTRAINT, FEDERAL RESERVE, GOOD, ACCOUNTABILITY, BAD DEBTS, COMMERCIAL CREDIT, OWNERSHIP STRUCTURE, MARKET FAILURES, ACCESS TO CAPITAL, FINANCIAL CRISIS, LOAN QUANTITIES, FUTURE, VALUE, SUPPLY OF CREDIT, SMALL BUSINESS LENDING, GOVERNMENT BANKS, DEFAULT RATES, BANK, RETURNS, CREDIT, CONTRACT, REGULATORY REPORTS, FOREIGN BANKS, COMMERCIAL LOANS, SHARES, LOAN SPREAD, BALANCE SHEET, MARKET, DEFAULT, LOAN DEMAND, INSIDER TRADING, ECONOMICS, SECURITIES, TREASURY, LENDING DECISION, GOVERNANCE, SHAREHOLDERS, BUSINESS CYCLES, TAXATION, ECONOMIC DEVELOPMENT, CORPORATE DEBT, PUBLIC SAVING, BANK LOANS, FINANCIAL MARKET, LOAN VOLUME, INVESTMENT, OUTSTANDING DEBT, RISK, COMMERCIAL BANKS, SHARE, LOAN PORTFOLIOS, COLLATERAL, BALANCE SHEETS, CREDIT QUALITY, FINANCIAL INFORMATION, LOAN SIZE, FINANCIAL MARKETS, DEFAULT RATE, BANKING, BANK SUPERVISION, REVENUE, PROFIT, OUTSTANDING AMOUNT, BORROWING, LENDING, CHECK, GOVERNMENT LENDING, MATURITIES, PUBLIC BANKS, PUBLIC SPENDING, LIABILITIES, GOVERNMENTS, ARREARS, BANK SIZE, GUARANTEE, ECONOMIC CONDITIONS, FOREIGN BANK, LENDING INSTITUTIONS, CREDIT MARKET, LOAN DATA, DEBT MATURITY,
Online Access:	http://documents.worldbank.org/curated/en/2016/02/25970617/political-economy-bank-lending-evidence-emerging-market https://hdl.handle.net/10986/23915
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