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...

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Bibliographic Details
Main Authors: Agarwal, Sumit, Morais, Bernardo, Ruiz, Claudia, Zhang, Jian
Format: Working Paper
Language:English
en_US
Published: World Bank, Washington, DC 2016
Subjects:
TAX
Online Access:http://documents.worldbank.org/curated/en/2016/02/25970617/political-economy-bank-lending-evidence-emerging-market
http://hdl.handle.net/10986/23915
id okr-10986-23915
recordtype oai_dc
repository_type Digital Repository
institution_category Foreign Institution
institution Digital Repositories
building World Bank Open Knowledge Repository
collection World Bank
language English
en_US
topic 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
spellingShingle 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
Agarwal, Sumit
Morais, Bernardo
Ruiz, Claudia
Zhang, Jian
The Political Economy of Bank Lending : Evidence from an Emerging Market
geographic_facet Latin America & Caribbean
Mexico
relation Policy Research Working Paper;No. 7577
description 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.
format Working Paper
author Agarwal, Sumit
Morais, Bernardo
Ruiz, Claudia
Zhang, Jian
author_facet Agarwal, Sumit
Morais, Bernardo
Ruiz, Claudia
Zhang, Jian
author_sort Agarwal, Sumit
title The Political Economy of Bank Lending : Evidence from an Emerging Market
title_short The Political Economy of Bank Lending : Evidence from an Emerging Market
title_full The Political Economy of Bank Lending : Evidence from an Emerging Market
title_fullStr The Political Economy of Bank Lending : Evidence from an Emerging Market
title_full_unstemmed The Political Economy of Bank Lending : Evidence from an Emerging Market
title_sort political economy of bank lending : evidence from an emerging market
publisher World Bank, Washington, DC
publishDate 2016
url http://documents.worldbank.org/curated/en/2016/02/25970617/political-economy-bank-lending-evidence-emerging-market
http://hdl.handle.net/10986/23915
_version_ 1764455113139683328
spelling okr-10986-239152021-04-23T14:04:18Z The Political Economy of Bank Lending : Evidence from an Emerging Market Agarwal, Sumit Morais, Bernardo Ruiz, Claudia Zhang, Jian 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 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. 2016-03-09T22:15:42Z 2016-03-09T22:15:42Z 2016-02 Working Paper http://documents.worldbank.org/curated/en/2016/02/25970617/political-economy-bank-lending-evidence-emerging-market http://hdl.handle.net/10986/23915 English en_US Policy Research Working Paper;No. 7577 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank World Bank, Washington, DC Publications & Research Publications & Research :: Policy Research Working Paper Latin America & Caribbean Mexico