Private Credit Under Political Influence: Evidence from France
44 Pages Posted: 5 Aug 2019 Last revised: 24 Sep 2019
Date Written: July 31, 2019
Politicians influence the lending decisions of independent private banks in order to increase their chances of being re-elected. In exchange, they grant these banks access to the profitable market for loans to local government entities. Using the French credit registry between 2007--2017, we find that credit to the private sector increases by 9% to 14% the year before a powerful incumbent faces a contested election. Consistent with politicians returning the favor, banks that grant more credit to private firms in pre-election years gain market shares in the market for local government debt after the election. Our results show that as long as there exist rents that politicians can allocate discretionarily, formal independence is insufficient to sever the link between political motives and the private sector.
Keywords: Politics and Banking, Moral Suasion, Local Government Financing
JEL Classification: G21, G30, H74, H81
Suggested Citation: Suggested Citation