The Political Economy of Bank Lending : Evidence from an Emerging Market
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...
| Main Authors: | , , , |
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| Format: | Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2016
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2016/02/25970617/political-economy-bank-lending-evidence-emerging-market http://hdl.handle.net/10986/23915 |
| Summary: | 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. |
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