Lending Cycles and Real Outcomes: Costs of Political Misalignment

106 Pages Posted: 11 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

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Date Written: December 26, 2018

Abstract

We document a strong political cycle in bank credit and industry outcomes in Turkey. In line with theories of tactical redistribution, state-owned banks systematically adjust their lending around local elections compared with private banks in the same province based on electoral competition and political alignment of incumbent mayors. This effect only exists in corporate lending as opposed to consumer loans. It creates credit constraints for firms in opposition areas, which suffer drops in employment and sales but not firm entry. There is substantial misallocation of financial resources as provinces and industries with high initial efficiency suffer the greatest constraints.

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 (December 26, 2018). LEQS Paper No. 139, Available at SSRN: https://ssrn.com/abstract=3307024 or http://dx.doi.org/10.2139/ssrn.3307024

Cagatay Bircan

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

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Orkun Saka (Contact Author)

City, University of London ( email )

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London School of Economics & Political Science (LSE)

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Systemic Risk Centre & STICERD

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