In many countries, banks lend to related parties, e.g., to firms controlled by the bank’s owners. We examine the benefits of related lending using a newly assembled dataset for Mexico. We find that related lending is large (20 % of commercial loans) and that it takes place on better terms than arm’s-length lending (annual interest rates are 4 percentage points lower). Related loans are 33 % more likely to default and, when they do, have lower recovery rates (30 cents/dollar less) than unrelated ones. The evidence supports the view that related lending, rather than enhancing information sharing, is a manifestation of looting
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