Politics in Financial Intermediation: Evidence from Brazil


 Using highly granular banking data from Brazil, we reveal a political bias in the intermediation of liquidity windfalls. Following a rise in deposits due to natural resource booms, state-owned banks increase credit supply outside of resource-rich areas by more if the destination municipality is politically aligned with the ruling president. In contrast, private banks redistribute significantly less funds to a destination municipality if it exhibits this same alignment. Unlike previous studies, our results are not driven by changes in lending policies during election years or amidst strong political competition faced by an allied incumbent. Instead, we find stronger effects when the allied incumbent was elected with a large margin of victory, suggesting that our results primarily arise from favoritism towards strong allies. Political lending by state-owned banks has a negative impact on bank profitability, indicating a misallocation of credit.


If you have any questions regarding the seminar, please contact the seminar organizers Tim Maurer or Camilla Nesfossen Hopsdal