Credit, Cronyism, and Control: Evidence from the Americas

This paper examines the effects of corruption and government control of the banking system on the sensitivity of commercial lending rates to changes in international financial market conditions. Using a sample of 18 countries located in the Western hemisphere (the “Americas”), we find that most countries’ lending rates are insensitive to changes in international financial market conditions. Only the least corrupt nations, which also have zero or low levels of government control of the banking system, exhibited a significant positive relation between commercial lending rates and international financial market conditions. The responsiveness of these short-term lending rates is nonlinearly related to the levels of corruption and government control of banks in the economy. Countries with less corruption and government intervention are more likely to allocate credit based on market-wide influences rather than fall prey to the pressures of special interest groups. The nonlinear effects of corruption and government intervention suggest that low-to-moderate levels of corruption may actually lower commercial lending rates while high levels of corruption can increase commercial lending rates. The converse is true for government intervention’s effect on commercial lending rates.