Credit Allocation When Private Banks Distribute Government Loans
Jose Ornelas (),
Claudia Ruiz-Ortega and
Thiago Silva ()
No 548, Working Papers Series from Central Bank of Brazil, Research Department
We study bank lending when private banks distribute subsidized loans. In Brazil, private banks operate in two credit markets: a competitive free market and an earmarked market characterized by government-funded loans at below-market interest rates. We find that banks are more likely to extend earmarked loans to larger firms and firms with existing relationships. We further document a novel cross-selling strategy whereby banks increase the price of free-market loans for riskier borrowers that obtain earmarked credit.
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