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Credit Allocation When Private Banks Distribute Government Loans

Jose Ornelas (), Alvaro Pedraza, Claudia Ruiz-Ortega and Thiago Silva ()

No 548, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: 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.

Date: 2021-04
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