Banking on Politics

2010. The World Bank Economic Review. 24(2).Pp 234-279. DOI: 10.1093/wber/lhq007

Claudio Raddatz K, Matías Braun

Abstract:

New data are presented for a large number of countries on how frequently former high-ranking politicians become bank directors. Politician-banker connections at this level are relatively rare, but their frequency is robustly correlated with many important characteristics of banks and institutions. At the micro level, banks that are politically connected are larger and more profitable than other banks, despite being less leveraged and having less risk. At the country level, this connectedness is strongly negatively related to economic development. Controlling for this, the analysis finds that the phenomenon is more prevalent where institutions are weaker and governments more powerful but less accountable. Bank regulation tends to be more pro-banker and the banking system less developed where connectedness is higher. A benign, publicinterest view is hard to reconcile with these patterns. Banking sector development, institutions, political economy.

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