Abstract

Our research aims to determine whether banks and local officials in France commonly exchange favors so that vulnerable political incumbents can boost their local economies in a bid to increase their reelection chances. Using their influence, officials can encourage banks to provide credit to troubled companies in their districts. We found that between 2007 and 2017, credit to the private sector rose from 9% to 14% during years when an incumbent faced a difficult election. In return, banks which helped officials get reelected gained a greater share in the market of providing loans to local authorities and public-sector organizations in subsequent years. We show that when politicians thus exert their influence, the private sector is no longer truly independent and will continue to be affected by politically motivated distortions.
Anne-Laure Delatte, Adrien Matray, Noémie Pinardon-Touati, Private Credit Under Political Influence: Evidence from France, April 18, 2019. https://ssrn.com/abstract=3374516

Three questions for Noémie Pinardon-Touati, HEC doctoral student

Why did you choose this particular study?

I got involved in this project thanks to Adrien Matray, a professor at Princeton, where I began my thesis program, who was aware of my taste for quantitative tasks involving huge databases! Anne-Laure Delatte, a research fellow at CRNS, launched this study. She was made aware of the issue when a friend of hers, who was the financial director of an SME in difficulty, commented that her company had been surprised to receive a loan from its bank and added, “The elections are coming up. We’re lucky!” A few months later, the Banque de France announced that its database was available to researchers, with anonymous access to information about lines of credit granted to companies. We decided to verify whether private banks, which are in principle free from any political influence, reacted to electoral cycles. The answer was yes.

How can you prove that this increase in loans is the result of influence by elected officials?

Our method was to establish a treatment group and a control group, as in a clinical trial. If the hypothesis that local officials exerted influence was true, then loan activity should have risen in districts where candidates faced close elections. This was our treatment group. And we found that loan activity did in fact rise significantly before elections in these districts! We then needed to determine why private banks agreed to help these officials.  Using data on loans granted to public entities, we employed the same method: a treatment group and a control group. And we found that, just after elections in which the incumbent was reelected, banks did indeed gain a greater share in the market of providing loans to local authorities and other public-sector organizations.

What impact does this “quid pro quo” phenomenon have on the economy?

Granting loans to companies in trouble based on criteria other than economic factors mobilizes resources that could be better employed elsewhere, for example in innovative sectors. In addition, banks charge higher-than-average rates for loans to local authorities, so this exchange of favors puts a greater financial burden on these authorities, which ultimately results in higher local taxes. It’s necessary to oversee banks’ choices, or at least to ensure that this process is transparent, for example by publishing a credit registry.

Noémie Pinardon-Touati (H.15)
A third-year doctoral student in the HEC Department of Finance, she studied economices in the HEC Master in Economics program (X-ENSAE-HEC) and at the Paris School of Economics.

 

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