Lending Cycles and Real Outcomes: Costs of Political Misalignment. LEQS Paper No. 139/2018 December 2018

We document a strong political cycle in bank credit and industry outcomes in Turkey. In line with theories of tactical redistribution, state-owned banks systematically adjust their lending around local elections compared with private banks in the same province based on electoral competition and political alignment of incumbent mayors. This effect only exists in corporate lending as opposed to consumer loans. It creates credit constraints for firms in opposition areas, which suffer drops in employment and sales but not firm entry. There is substantial misallocation of financial resources as provinces and industries with high initial efficiency suffer the greatest constraints

Domestic banks as lightning rods? Home bias and information during Eurozone crisis

European banks have been criticized for holding excessive domestic government debt during economic downturns, which may have intensified the diabolic loop between sovereign and bank credit risks. By using a novel bank-level dataset covering the entire timeline of the Eurozone crisis, I first re-confirm that the crisis led to the reallocation of sovereign debt from foreign to domestic banks. This reallocation was only visible for banks as opposed to other domestic private agents and it cannot be explained by the banks' risk-shifting tendency. In contrast to the recent literature focusing only on sovereign debt, I show that banks' private sector exposures were (at least) equally affected by a rise in home bias. Finally, consistent with these patterns, I propose a new debt reallocation channel based on informational frictions and show that informationally closer foreign banks increase their relative exposures when sovereign risk rises. The effect of informational closeness is economically meaningful and robust to the use of different information measures and controls for alternative channels of sovereign debt reallocation

There is a good reason for EU banks to hold their own country's sovereign debt

The so called ‘moral suasion’ hypothesis indicates that governments may implicitly force their domestic banks to hold a larger chunk of government bonds when they experience stress. But is this reason to shift responsibilities from national to supranational institutions? Orkun Saka argues that there is in fact a good reason for EU banks to hold their own country’s sovereign debt: commercial banks have an informational advantage that allows them to act as buyers of last resort, absorbing local assets while potentially uninformed foreign banks may shed their exposure

Conflicts of interest may bias research in finance and economics

Economists have explicitly recognised the possibility that regulatory agencies may be captured by those whom they are supposed to regulate. However, the economics profession has been much more hesitant about recognising similar conflicts of interests that may exist in economics and finance research (i.e., academic capture). Thorsten Beck and Orkun Saka report on the related discussions and research recently presented at the second London Political Finance (POLFIN) workshop

Elections and economic cycles: what can we learn from the recent Turkish experience?

This chapter studies the presence of political cycles in Turkey’s recent economic history. It first discusses the incentives and the ability of the central government to engage in opportunistic behavior to boost economic activity around local elections. It then describes how the tools available to the government on the fiscal and banking fronts have changed since the 2001 crisis. The chapter documents suggestive evidence that state-owned banks engage in selective lending in the run-up to local elections when compared with private banks. This selective lending seems to favor provinces where the governing party faces greater competition from the opposition. There is less evidence regarding fiscal spending. The chapter discusses the implications of politically motivated policies on financial inclusion and aggregate efficiency

Domestic banks as lightning rods? Home bias during the Eurozone crisis. LEQS Discussion Paper No. 122/2017 February 2017

Governments and domestic banks in Europe have attracted criticism due to the heightening inclination of banks to hold more local sovereign debt in the midst of the crisis. This has traditionally been interpreted as an evidence of financial repression or moral suasion. By using a novel dataset on bank-level exposures to sovereign and private debt covering the entire Eurozone crisis, I confirm that sovereign debt has been reallocated from foreign to domestic banks at the peak of the crisis. Furthermore, this reallocation has been especially visible for banks as opposed to other domestic private agents and cannot be explained by the risk-shifting tendency of the banks located in troubled countries. However, in contrast to the previous literature focusing only on sovereign debt, I show that banks’ private sector exposures have su��ered (at least) equally from a rising home bias. Finally, I present a direct information channel and demonstrate that foreign banks – free from moral suasion – located in informationally closer territories have relatively increased their exposures to crisis-countries

Domestic banks as lightning rods? Home bias during the eurozone crisis. CEPS Working Document No 2018/03, March 2018

European banks have been criticized for holding excessive domestic government debt during economic downturns, which has been interpreted as indicative evidence of moral suasion. By using a novel bank-level dataset covering the entire timeline of the eurozone crisis, I first re-confirm that the crisis led to the reallocation of sovereign debt from foreign to domestic banks. This reallocation was only visible for banks as opposed to other domestic private agents and it cannot be explained by the banks’ risk-shifting tendency. In contrast to the recent literature focusing only on sovereign debt, I show that banks’ private sector exposures were (at least) equally affected by a rise in home bias. Finally, I propose a new debt reallocation channel based on informational frictions and show that crisis-country debt was not only reallocated to domestic banks, but also to the informationally closer foreign banks. My results imply that informational asymmetries among banks played a key role in the recent fragmentation across eurozone debt markets

The political scar of epidemics

What will be the political legacy of the Coronavirus pandemic? We find that epidemic exposure in an individual’s “impressionable years” (ages 18 to 25) has a persistent negative effect on confidence in political institutions and leaders. We find similar negative effects on confidence in public health systems, suggesting that the loss of confidence in political leadership and institutions is associated with healthcare-related policies at the time of the epidemic. In line with this argument, our results are mostly driven by individuals who experienced epidemics under weak governments with less capacity to act against the epidemic, disappointing their citizens. We provide evidence of this mechanism by showing that weak governments took longer to introduce policy interventions in response to the COVID-19 outbreak. These results imply that the Coronavirus may leave behind a long-lasting political scar on the current young generation (“Generation Z”)

Transparency about risks and consistent messaging may reduce vaccine scepticism

Perceptions of government inaction or political interference with trials and regulatory approval may foster doubts about safety, write Barry Eichengreen, Cevat Giray Aksoy and Orkun Sak

Fintech adoption during epidemics depends on pre-existing inequalities

The Covid-19 pandemic has increased remote working, online shopping, and telehealth, with important differences across socioeconomic groups in their ability to use such new technologies. Orkun Saka, Barry Eichengreen and Cevat Giray Aksoy investigate past epidemics and find that they significantly increase the likelihood that individuals do their banking using the internet, mobile banks, and automated teller machines (ATMs). But inequality plays a role. Individuals who already have internet coverage are more likely to shift toward online banking during an epidemic