Abstract
Research on the determinants of commercial bank behavior has generally focused on financial and economic variables, ignoring political factors. Extending an earlier study by Brock and Suarez (2000) [Journal of Development Economics], we provide empirical evidence from Bolivia's recent experience that political events are important determinants of bank behavior. We find that news about the zero coca policy initiated in 1998, cancer news regarding the former president Banzer in 2001, and the recent 2002 political election, which was tied to the coca war, are all associated with changes in commercial bank spreads and deposits, affecting bank profits and growth. Our results are consistent with cross section studies that find that political instability contributes the bid-ask spread in both industrial and developing countries' asset markets.
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