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Winners and Losers When Private Banks Distribute Government Loans : Evidence from Earmarked Credit in Brazil (English)

This paper studies credit allocation when government loan programs are distributed by private banks. The study focuses on Brazil, where private lenders can operate in two credit markets: competitive loans with own funding and earmarked loans that rely on government funds to finance firms at below-the-market interest rates. Using rich loan-level data between 2005-2016, the paper finds that banks are disproportionally more likely to extend earmarked loans to larger firms and firms with an existing credit relationship. The paper further documents a cross-selling strategy whereby banks increase the price of free-market loans of riskier borrowers that also obtain earmarked credit. Inadvertently, the government selects winners and losers, since mostly larger businesses, those that bank with the largest private lenders, and those willing to bundle free-market and earmarked loans disproportionally access the program.

Details

  • Author

    Haas Ornelas,Jose Renato, Pedraza Morales,Alvaro Enrique, Ruiz Ortega,Claudia, Silva,Thiago

  • Document Date

    2019/07/30

  • Document Type

    Policy Research Working Paper

  • Report Number

    WPS8952

  • Volume No

    1

  • Total Volume(s)

    1

  • Country

    Brazil,

  • Region

    Latin America & Caribbean,

  • Disclosure Date

    2019/10/03

  • Disclosure Status

    Disclosed

  • Doc Name

    Winners and Losers When Private Banks Distribute Government Loans : Evidence from Earmarked Credit in Brazil

  • Keywords

    small and medium size enterprise; development research group; Financial Development and Growth; increase in interest rate; cost of work; journal of finance; fixed effect; in work; higher interest rate; loans from bank; private commercial bank; market interest rate; average interest rate; low interest rate; cost of finance; state-owned banks; lines of credit; small firm finance; firm level analysis; real estate financing; loans to business; number of workers; working capital; probability of default; lower interest rate; global financial crisis; finance and growth; contract work; private financial sector; multiple work; private bank; credit program; credit product; pricing strategy; private lender; government credit; credit term; large bank; credit allocation; firm size; credit market; government loan; risky borrower; bank-firm relationship; financial economics; indicator variable; benchmark specification; vehicle loans; free market; sample period; loan volume; loan spread; credit expansion; real effect; Fixed Assets; average share; bank lending; interest spreads; bank relationship; empirical work; outstanding credit; asymmetric information; implicit contract; negative effect; credit constraint; vertical line; bank charge; government fund; large business; financial intermediation; total credit; time sery; summary statistic; government intervention; risk taking; social objective; credit relationship; private benefit; robustness check; treasury yield; capital loan; large corporation; funding source; government source; interbank market; credit loss; monetary policy; inflation rate; multiple sources; demand deposit; mandatory saving; external funding; data capture; loan fund; direct credit; government directive; Investment Support; credit funds; corporate loan; loan finance; minimum loan; frequent basis; empirical evidence; medium enterprise; loan subsidy; existing credit; competitive credit; Job Creation; relationship lending; international money; political connections; preferential access; campaign contribution; banking sector; credit misallocation; firm growth; political influence; loan condition; bank behavior; financial market; bank liquidity; financial dependence; government ownership; finance research; construction sector; outside lender; large enterprise; micro enterprise; micro firms; smaller enterprise; high share; loan payment; program expansion; average cost; time t; aggregate trends; loan rate; investment opportunities; selection bias; multiple loan; low pricing; credit price; subsidized credit; common strategies; financial shock; political consideration; market rate; government lending; recent work; public fund; social return; protection program; application process; loan service; commercial credit; niche market; principal-agent considerations; special fund; price discrimination; credit line; profit maximizing; checking account; financial product; market revenue; brazilian context; bank service; private information; loan contract; rural activity; fixed investment; loan program; several years; own fund; government initiative; forced saving; Tax Exemption; reserve requirement; development policy; public bank; incentive problem; Research Support; open access

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Citation

Haas Ornelas,Jose Renato Pedraza Morales,Alvaro Enrique Ruiz Ortega,Claudia Silva,Thiago

Winners and Losers When Private Banks Distribute Government Loans : Evidence from Earmarked Credit in Brazil (English). Policy Research working paper,no. WPS 8952 Washington, D.C. : World Bank Group. http://documents.worldbank.org/curated/en/148531564513434960/Winners-and-Losers-When-Private-Banks-Distribute-Government-Loans-Evidence-from-Earmarked-Credit-in-Brazil