European banks are not immune to national elections
Fungáčová, Zuzana; Kerola, Eeva; Weill, Laurent (29.02.2024)
Numero
4/2024Julkaisija
Bank of Finland
2024
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi-fe202402299216Tiivistelmä
We investigate whether European banks adjust their loan prices and volumes of new lending in the months running up to major national elections. Using a unique dataset that draws on data covering some 250 banks in 19 Eurozone countries from 2010 to 2020 at monthly frequency, and that includes lending amounts and interest rates on new lending, we find that European banks increase loan rates for corporate and housing loans ahead of elections. This supports the view that loan pricing changes of European banks are driven by the electoral uncertainty inherent to the democratic election process. We find that the impact of elections is more pronounced for small banks, as well as obtain some evidence that elections affect the credit supply of banks. Our findings suggest that the occurrence of elections is affecting the behavior of European banks.
Julkaisuhuomautus
NON-TECHNICAL SUMMARY
FOCUS
Do elections affect the lending behavior of European banks? Do banks change their credit supply and their loan pricing when major national elections approach in European countries? The literature provides two views on how banks adjust their lending behavior around elections. The uncertainty view says that due to heightened uncertainty lending decreases and loan prices increase as an election approaches. Manipulation view, on the other hand, assumes that bank lending increases before an election because politicians seek to manipulate economic instruments to enhance their chances of re-election.
CONTRIBUTION
Using a unique dataset that draws on monthly data covering some 250 banks in 19 Eurozone countries from 2010 to 2020 we investigate whether banks adjust their loan prices and volumes of new lending in the months running up to major national elections. By doing so, we provide an initial investigation into the impact of major national elections on the lending behavior of banks in developed countries. This is important as nearly all of the studies investigating political interference in lending behavior of banks before elections rely on data from emerging countries. Utilizing our detailed dataset we check whether elections exert different impacts for corporate, housing, and consumption loans, thereby avoiding possible blurring of heterogeneous effects of elections on lending behavior that might arise if we only considered total bank lending.
FINDINGS
Our results provide evidence in line with the uncertainty view. European banks tend to increase their prices on corporate and housing loans in the months before elections. This supports the view that loan pricing changes of European banks are driven by the electoral uncertainty inherent to the democratic election process. We further find that the positive effect of upcoming elections on loan pricing mainly affects smaller banks. We obtain some evidence that elections influence the credit supply of banks as only the amounts of new housing loans decrease significantly. Further analysis shows that when elections are preceded by high uncertainty, the amount of new loans is lower in the months ahead of elections. Our results provide useful insights about changes in lending behavior of banks related to the electoral calendar.
FOCUS
Do elections affect the lending behavior of European banks? Do banks change their credit supply and their loan pricing when major national elections approach in European countries? The literature provides two views on how banks adjust their lending behavior around elections. The uncertainty view says that due to heightened uncertainty lending decreases and loan prices increase as an election approaches. Manipulation view, on the other hand, assumes that bank lending increases before an election because politicians seek to manipulate economic instruments to enhance their chances of re-election.
CONTRIBUTION
Using a unique dataset that draws on monthly data covering some 250 banks in 19 Eurozone countries from 2010 to 2020 we investigate whether banks adjust their loan prices and volumes of new lending in the months running up to major national elections. By doing so, we provide an initial investigation into the impact of major national elections on the lending behavior of banks in developed countries. This is important as nearly all of the studies investigating political interference in lending behavior of banks before elections rely on data from emerging countries. Utilizing our detailed dataset we check whether elections exert different impacts for corporate, housing, and consumption loans, thereby avoiding possible blurring of heterogeneous effects of elections on lending behavior that might arise if we only considered total bank lending.
FINDINGS
Our results provide evidence in line with the uncertainty view. European banks tend to increase their prices on corporate and housing loans in the months before elections. This supports the view that loan pricing changes of European banks are driven by the electoral uncertainty inherent to the democratic election process. We further find that the positive effect of upcoming elections on loan pricing mainly affects smaller banks. We obtain some evidence that elections influence the credit supply of banks as only the amounts of new housing loans decrease significantly. Further analysis shows that when elections are preceded by high uncertainty, the amount of new loans is lower in the months ahead of elections. Our results provide useful insights about changes in lending behavior of banks related to the electoral calendar.