Locking-In Firms: Loan Conditions in the Presence of Government-Driven Credit

26 Pages Posted: 6 Aug 2019

See all articles by Jose Renato Haas Ornelas

Jose Renato Haas Ornelas

Banco Central do Brasil

Alvaro Pedraza

World Bank

Claudia Ruiz Ortega

World Bank - Development Research Group (DECRG)

Thiago Silva

Government of the Federative Republic of Brazil - Central Bank of Brazil

Date Written: July 30, 2019

Abstract

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.

Keywords: Legal Institutions of the Market Economy, Food Security, Public Sector Economics, Public Finance Decentralization and Poverty Reduction, Access to Finance, Banks & Banking Reform

Suggested Citation

Ornelas, Jose Renato Haas and Morales, Alvaro and Ruiz Ortega, Claudia and Silva, Thiago, Locking-In Firms: Loan Conditions in the Presence of Government-Driven Credit (July 30, 2019). World Bank Policy Research Working Paper No. 8952. Available at SSRN: https://ssrn.com/abstract=3430567

Jose Renato Haas Ornelas (Contact Author)

Banco Central do Brasil ( email )

P.O. Box 08670
SBS Quadra 3 Bloco B - Edificio-Sede
Brasilia, Distrito Federal 70074-900
Brazil

HOME PAGE: http://www.bcb.gov.br

Alvaro Morales

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Claudia Ruiz Ortega

World Bank - Development Research Group (DECRG) ( email )

1818 H Street, NW
Washington, DC 20433
United States

Thiago Silva

Government of the Federative Republic of Brazil - Central Bank of Brazil ( email )

P.O. Box 08670
SBS Quadra 3 Bloco B - Edificio-Sede
Brasilia, Distr. Federal 70074-900
Brazil

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