Political Influence and Incentive: The Lending Behavior of a State-Owned Bank in the Global Financial Crisis

Abstract

Using a loan-level dataset from a state-owned bank (SOB) in an economically developed city in China, we examine the bank lending behavior when mandated to extend credit despite this global financial crisis. Accompanying a fiscal stimulus plan in November 2008, the Chinese government directs banks to increase loan supply, especially toward small- and medium-sized enterprises (SMEs) and several preferential industries (PIs). We find that, after the policy announcement, loan supply increases and the loans to state-owned enterprises (SOEs), relative to those to private firms, become larger in size and lower in interest rate despite the higher default risk. This finding suggests that, even in a highly commercialized city, the credit made by the SOB is still misallocated. Ironically, the bank increasingly prefers lending to large firms, especially large SOEs, and reduces the share of loans to PIs. Our qualitative evidence indicates that the bank’s non-compliance with government policy results from the career concern and incentive of bank managers.