Winners and Losers When Private Banks Distribute Government Loans : Evidence from Earmarked Credit in Brazil
This paper studies loan conditions in a context where private banks can operate in two credit markets: a free-market with no government intervention and an earmarked market that relies on government funds and where interest rates are regulated. The...
| Main Authors: | , , , |
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| Format: | Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2019
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/148531564513434960/Locking-in-Firms-Loan-Conditions-in-the-Presence-of-Government-Driven-Credit http://hdl.handle.net/10986/32153 |
| Summary: | This paper studies loan conditions in a
context where private banks can operate in two credit
markets: a free-market with no government intervention and
an earmarked market that relies on government funds and
where interest rates are regulated. The paper examines the
effects of earmarked lending on the spreads of free-market
loans using a rich loan-level dataset on all Brazilian firms
between 2005 and 2016. The evidence suggests that private
banks strategically channel earmarked credit to firms that
are ex ante more difficult to lock-in in the free-market–
larger firms in more contested regions. The paper highlights
a novel channel whereby earmarked credit is used by private
banks to extract more rents. Once a firm receives an
earmarked credit from its bank, its interest rates on new
loans in the free-market increase while the loan volume
remains mostly unaffected. |
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