Elections, macroprudential regulation and bank credit

The impact of elections on bank lending

In this paper, Fungáčová et al. analyze how major national elections impact the lending behavior of banks in developed countries. The authors use a dataset covering approximately 250 banks from 19 Eurozone countries from January 2010 to December 2020. This dataset includes detailed monthly data on new loans and interest rates, allowing for precise measurement of lending behaviors in relation to national elections. Their findings include:

• Loan pricing changes of European banks are driven by electoral uncertainty as they increase loan rates for corporate and housing loans ahead of elections.
• The positive effect of upcoming elections on loan pricing mainly concerns small banks.
• The evidence shows that elections influence the credit supply of housing loans. But there is no evidence of the impact of elections on the amounts of new corporate and consumption loans with the exception of periods of extremely elevated uncertainty.

European banks are not immune to national elections
Authors: Zuzana Fungáčová, Eeva Kerola, Laurent Weill
From: Bank of Finland, Université de Strasbourg

The impact of elections on macroprudential policies

In this paper, Karsten Müller analyzes the potential political challenges to implementing macroprudential policies. The author uses data on a) changes in macroprudential policy; b) data on general election dates; c) data on macroeconomic and financial sector conditions; and d) data on a wide range of institutional and political characteristics in 58 countries between 2000 to 2014. He finds:

• The election cycle in macroprudential policy is stronger during periods of high bank profitability and house price growth, precisely when the countercyclical policy is supposed to help cushion bank balance sheets against a reversal of fortunes.
• The electoral cycle particularly bites for tools aimed at households, such as capital buffers targeting mortgages, caps to loan-to-value (LTV), debt-service-to-income (DSTI) ratios, and housing-related taxes.

I find that macroprudential policies targeting household credit are predictably looser in the run-up to general elections. Quantitatively, the estimated effect of upcoming elections is broadly comparable to the reaction of macroprudential policy to a one standard deviation increase in credit growth, which suggests that political factors are important for understanding how macroprudential tools are used in practice. This finding is robust to controlling for a large number of macroeconomic and financial sector variables and continues to hold using a wide array of model specifications.

Electoral Cycles in Macroprudential Regulation
Authors: Karsten Müller
From: National University of Singapore