Private Credit Under Political Influence: Evidence from France
40 Pages Posted: 5 Aug 2019 Last revised: 12 Nov 2020
Date Written: July 31, 2019
Formally independent private banks change their supply of credit to the corporate sector for the constituencies of contested political incumbents in order to improve their reelection prospects. In return, politicians grant such banks access to the profitable market for loans to local public entities among their constituencies. We examine French credit registry data for 2007--2017 and find that credit granted to the private sector increases by 9\%--14\% in the year during which a powerful incumbent faces a contested election. In line with politicians returning the favor, banks that grant more credit to private firms in election years gain market share in the local public entity debt market after the election is held. Thus we establish that, if politicians can control the allocation of rents, then formal independence does not ensure the private sector's effective independence from politically motivated distortions.
Keywords: Politics and Banking, Moral Suasion, Local Government Financing
JEL Classification: G21, G30, H74, H81
Suggested Citation: Suggested Citation