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Credit Allocation When Private Banks Distribute Government Loans

Author

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  • José Renato Haas Ornelas
  • Alvaro Pedraza
  • Claudia Ruiz-Ortega
  • Thiago Christiano Silva

Abstract

We study bank lending when private banks distribute subsidized loans. In Brazil, private banks operate in two credit markets: a competitive free market and an earmarked market characterized by government-funded loans at below-market interest rates. We find that banks are more likely to extend earmarked loans to larger firms and firms with existing relationships. We further document a novel cross-selling strategy whereby banks increase the price of free-market loans for riskier borrowers that obtain earmarked credit.

Suggested Citation

  • José Renato Haas Ornelas & Alvaro Pedraza & Claudia Ruiz-Ortega & Thiago Christiano Silva, 2021. "Credit Allocation When Private Banks Distribute Government Loans," Working Papers Series 548, Central Bank of Brazil, Research Department.
    • Handle: RePEc:bcb:wpaper:548
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    Cited by:

    1. Thiago Christiano Silva & Sergio Rubens Stancato de Souza & Solange Maria Guerra, 2021. "COVID-19 and Local Market Power in Credit Markets," Working Papers Series 558, Central Bank of Brazil, Research Department.

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