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Lending Cycles and Real Outcomes: Costs of Political Misalignment

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  • Çağatay Bircan
  • Saka Orkun

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.

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  • Çağatay Bircan & Saka Orkun, 2018. "Lending Cycles and Real Outcomes: Costs of Political Misalignment," LEQS – LSE 'Europe in Question' Discussion Paper Series 139, European Institute, LSE.
    • Handle: RePEc:eiq:eileqs:139
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    3. Fungáčová, Zuzana & Schoors, Koen & Solanko, Laura & Weill, Laurent, 2023. "Staying on top: Political cycles in private bank lending," Journal of Comparative Economics, Elsevier, vol. 51(3), pages 899-917.
    4. Pinar Deniz & Burhan Can Karahasan & Mehmet Pinar, 2021. "Determinants of regional distribution of AKP votes: Analysis of post‐2002 parliamentary elections," Regional Science Policy & Practice, Wiley Blackwell, vol. 13(2), pages 323-352, April.
    5. Jing, Zhongbo & Liu, Wei & Wang, Zexi & Wei, Lu & Zhang, Xuan, 2024. "Does local government debt regulation improve rural banks’ performance? Evidence from China," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 91(C).
    6. Lisa Ahsen Sezer & Gül Berna Özcan, 2024. "Local champions and change of governments: a longitudinal analysis of firms’ political ties in Gaziantep, Turkey," Journal of Economic Geography, Oxford University Press, vol. 24(2), pages 263-283.
    7. Ayberk, İdil & Önder, Zeynep, 2022. "House prices and bank loan portfolios in an emerging market: The role of bank ownership," Economic Modelling, Elsevier, vol. 106(C).
    8. Saka, Orkun & Ji, Yuemei & De Grauwe, Paul, 2021. "Financial policymaking after crises : Public vs. private interests," BOFIT Discussion Papers 10/2021, Bank of Finland, Institute for Economies in Transition.
    9. Fungáčová, Zuzana & Kerola, Eeva & Weill, Laurent, 2024. "European banks are not immune to national elections," BOFIT Discussion Papers 4/2024, Bank of Finland Institute for Emerging Economies (BOFIT).
    10. Li, Xiang, 2022. "The role of state-owned banks in crises: Evidence from German banks during COVID-19," IWH Discussion Papers 6/2022, Halle Institute for Economic Research (IWH), revised 2022.
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    More about this item

    Keywords

    Bank credit; Electoral cycle; State-owned banks; Credit misallocation;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State

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