1 / 2016-11-08 00:36:01

Political institutions, political pressure and state-owned Banks: an international evidence

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Theories of political benefits argue that politicians use state-owned banks for political purposes such as obtaining and maintaining political support. While theories of social welfare goal argue that state-owned banks exist to counter market failures and finance socially important projects. This paper is a contribution to theories of political benefits of state-owned banks. Using an international sample of 185 state-owned banks from 51 developing countries over the period 1998-2012, we report two main findings. First, we find significant political pressure on state-owned banks; that is, state-owned banks lend more and earn less in election years in developing countries. Second, we find that political pressure is more prevalent in weak political institution developing countries but not in strong political institutions countries. Strong political institutions in the form of higher constraints on policy change by any one fraction of the government and higher democratic accountability in developing countries are helpful in eliminating political pressure on state-owned banks.