We analyze the profitability of government-owned banks' lending to their owners. We find evidence that such related lending is used to transfer bank profits to the governments, but only in localities where the incumbent politicians face significant competition for reelection. In localities where the incumbent party has a high probability of reelection there is no such evidence. This result establishes a causal link behind extant evidence that banks' lending to controlling parties (owners and directors) can result in "looting" of the banks. We show that such looting occurs when controlling parties are at risk of losing control.
Humboldt Universität zu Berlin