Content uploaded by Serdar Dinc
Author content
All content in this area was uploaded by Serdar Dinc on Dec 13, 2013
Content may be subject to copyright.
A preview of the PDF is not available
The Politics of Bank Failures: Evidence from Emerging Markets
Abstract and Figures
This paper studies large private banks in 21 major emerging markets in the 1990s. It first demonstrates that bank failures
are very common in these countries: about 25 percent of these banks failed during the seven-year sample period. The paper
also shows that political concerns play a significant role in delaying government interventions to failing banks. Failing
banks are much less likely to be taken over by the government or to lose their licenses before elections than after. This
result is robust to controlling for macroeconomic and bank-specific factors, a new party in power, early elections, outstanding
loans from the IMF, as well as country-specific, time-independent factors. This finding implies that much of the within-country
clustering in emerging market bank failures is directly due to political concerns.
Figures - uploaded by Serdar Dinc
Author content
All figure content in this area was uploaded by Serdar Dinc
Content may be subject to copyright.
... Governments have political influence on banks and can manipulate bank lending. Studies show that they can either exert direct control on stateowned banks (Carvalho, 2014;Dinç, 2005) or indirectly influence private banks using a wide range of instruments such as threating banking license withdrawal, changing banking regulation, or controlling access to the public entity loan market (Kroszner & Strahan, 1999;Brown & Dinç, 2005). Such political intervention is more likely to occur in less democratic countries, where there are no effective checks and balances or free media to limit such manipulation. ...
We examine the effect of regional favoritism on the access of firms to credit. Using firm-level data on a large sample of 29,000 firms covering 47 countries, we investigate the hypothesis that firms in the birth regions of national political leaders have better access to credit. Our evidence suggests that firms located in birth regions of political leaders are less likely to be credit constrained. We further find that firms in leader regions feel less discouraged in applying for loans and also get preferential lending from banks.
Financial institutions received investments under the Troubled Asset Relief Program in a bad state of the world but repaid them in a relatively good state. We show that the recipients paid considerably lower returns to taxpayers compared to private‐market securities with similar risk over the same investment horizon, resulting in a subsidy of over $50 billion on the preferred equity investment by the government. Ex‐post renegotiation of contract terms limited the upside gains received by taxpayers in good times and contributed to the subsidy. These findings have important implications for the design and implementation of future bailouts. Our simple methodology for calculating the subsidy can be applied to evaluate the financial costs of other bailouts.
Political influence on bank credit allocation is often viewed as being necessary to address social problems like income inequality. We hypothesize that such influence elicits bank capital responses. Our hypothesis yields three testable predictions for which we find supporting evidence. First, when banks observe election outcomes that suggest greater impending political credit-allocation influence, they reduce capital to increase fragility and deter political influence. Second, banks subject to greater political influence nonetheless increase lending that politicians favor, and household consumption consequently increases. Third, these banks exhibit poorer post-lending performance. Our study has implications for the interaction between politics, household consumption, and bank risk through a specific channel—the interplay between credit-allocation regulation and bank capital structure.
This paper was accepted by Victoria Ivashina, finance.
Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.04056 .
There is an extensive empirical literature on political business cycles, but its theoretical foundations are grounded in pre-rational expectations macroeconomic theory. Here we show that electoral cycle in taxes, government spending and money growth can be modeled as an equilibrium signaling process. The cycle is driven by temporary information asymmetries which can arise if, for example, the government has more current information on its performance in providing for national defense. Incumbents cheat least when their private information is either extremely favorable or extremely unfavorable. An exogenous increase in the incumbent party's popularity does not necessarily imply a damped policy cycle.
The authors of The Economic Effects of Constitutions use econometric tools to study what they call the "missing link" between constitutional systems and economic policy; the book is an uncompromisingly empirical sequel to their previous theoretical analysis of economic policy. Taking recent theoretical work as a point of departure, they ask which theoretical findings are supported and which are contradicted by the facts. The results are based on comparisons of political institutions across countries or time, in a large sample of contemporary democracies. They find that presidential/parliamentary and majoritarian/proportional dichotomies influence several economic variables: presidential regimes induce smaller public sectors, and proportional elections lead to greater and less targeted government spending and larger budget deficits. Moreover, the details of the electoral system (such as district magnitude and ballot structure) influence corruption and structural policies toward economic growth.Persson and Tabellini's goal is to draw conclusions about the causal effects of constitutions on policy outcomes. But since constitutions are not randomly assigned to countries, how the constitutional system was selected in the first place must be taken into account. This raises challenging methodological problems, which are addressed in the book. The study is therefore important not only in its findings but also in establishing a methodology for empirical analysis in the field of comparative politics.
This paper investigates private-interest, public-interest, and political-institutional theories of regulatory change to analyze state-level deregulation of bank branching restrictions. Using a hazard model, we find that interest group factors related to the relative strength of potential winners (large banks and small, bank-dependent firms) and losers (small banks and the rival insurance firms) can explain the timing of branching deregulation across states during the last quarter century. The same factors also explain congressional voting on interstate branching deregulation. While we find some support for each theory, the private interest approach provides the most compelling overall explanation of our results.