Lending cycles and real outcomes: costs of political misalignment

By Çağatay Bircan and Orkun Saka

Do banks change their lending behaviour in the run-up to local elections? Using credit data from Turkey, we find that state-owned banks (compared with private banks) either increase or reduce corporate lending, depending on whether the incumbent mayor is aligned with the ruling party or the opposition. When corporate lending goes up, so does job creation and economic output. When it is reduced in provinces where the incumbent mayor is aligned with opposition parties, employment and firm sales drop instead. These findings support theories of tactical financial redistribution by the government to manipulate voters and give its own mayors a better chance in upcoming elections.