Lending Cycles and Real Outcomes: Costs of Political Misalignment

86 Pages Posted: 24 Jan 2019

See all articles by Cagatay Bircan

Cagatay Bircan

European Bank for Reconstruction and Development (EBRD)

Orkun Saka

City, University of London; London School of Economics & Political Science (LSE); Systemic Risk Centre & STICERD; CESifo Network

Multiple version iconThere are 4 versions of this paper

Date Written: January 21, 2019

Abstract

We use data on the universe of credit in Turkey to document a strong political lending cycle. State-owned banks systematically adjust their lending around local elections compared with private banks in the same province. There is considerable tactical redistribution: state-owned banks increase credit in politically competitive provinces which have an incumbent mayor aligned with the ruling party, but reduce it in similar provinces with an incumbent mayor from the opposition parties. This effect only exists in corporate lending as opposed to consumer loans, suggesting that tactical redistribution targets job creation to increase electoral success. Political lending influences real outcomes as credit-constrained opposition areas suffer drops in employment and firm sales. There is substantial misallocation of financial resources as credit constraints most affect provinces and industries with high initial efficiency.

Keywords: Bank credit, Electoral cycle, State-owned banks, Credit misallocation

JEL Classification: G21, D72, D73, P16

Suggested Citation

Bircan, Cagatay and Saka, Orkun, Lending Cycles and Real Outcomes: Costs of Political Misalignment (January 21, 2019). BOFIT Discussion Paper No. 1/2019, Available at SSRN: https://ssrn.com/abstract=3321599 or http://dx.doi.org/10.2139/ssrn.3321599

Cagatay Bircan (Contact Author)

European Bank for Reconstruction and Development (EBRD) ( email )

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Orkun Saka

City, University of London ( email )

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London School of Economics & Political Science (LSE)

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