Winners and Losers When Private Banks Distribute Government Loans: Evidence from Earmarked Credit in Brazil
25 Pages Posted: 6 Aug 2019 Last revised: 28 Apr 2020
Date Written: July 30, 2019
This paper studies credit allocation when government loan programs are distributed by private banks. The study focuses on Brazil, where private lenders can operate in two credit markets: competitive loans with own funding and earmarked loans that rely on government funds to finance firms at below-the-market interest rates. Using rich loan-level data between 2005-2016, the paper finds that banks are disproportionally more likely to extend earmarked loans to larger firms and firms with an existing credit relationship. The paper further documents a cross-selling strategy whereby banks increase the price of free-market loans of riskier borrowers that also obtain earmarked credit. Inadvertently, the government selects winners and losers, since mostly larger businesses, those that bank with the largest private lenders, and those willing to bundle free-market and earmarked loans disproportionally access the program.
Keywords: Legal Institutions of the Market Economy, Food Security, Public Sector Economics, Public Finance Decentralization and Poverty Reduction, Access to Finance, Banks & Banking Reform
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