The Dark Side of Political Connection: Exchange Easy Loans for the Political Career of Bank CEOs

Abstract

We study the effects of CEOs’ political connections on the operating performance of government banks during the global financial crisis. Using data for 41 countries from 2006 to 2009, we find that government banks with politically connected CEOs prior to the crisis demonstrate poorer operating performance during the crisis than those without politically connected CEOs. Our evidence suggests that a government bank’s decisions can be influenced by its politically connected CEOs’ use of their power and influence to relax lending standards and to reap private benefits that thus raise their banks’ sensitivity to a crisis.