Electoral cycles in savings bank lending

Abstract

We provide evidence that German savings banks, which are controlled by county-level politicians, systematically adjust lending policies in response to local electoral cycles. The different timings of county elections across states and the existence of a comparable group of cooperative banks-that are very similar to savings banks but lack their political connectedness-allow for identification of the effects of county elections on savings bank lending. These effects are economically meaningful and very robust to various specifications. We find that election-induced lending negatively impacts savings bank profitability and is associated with an increase in credit defaults roughly three years after an election. Examining the political-economy aspects of our findings, we provide evidence that savings bank excess lending and public spending at the county level are substitute levers for county politicians. Finally, we find indications that subpar pre-election economic county performance hurts re-election prospects and increases the intensity of lending cycles.