Left-leaning and right-leaning governments hold opposing views on economic policy, resulting in disparities in economic behaviours and outcomes. Given this context, we explore the effect of political ideology on domestic credit using an unbalanced panel data of 29 countries from 1960 to 2014. Our empirical analysis shows that left-leaning governments reduce total domestic credit allocations. Also, we find that right-leaning governments provide more credit to the private sector, while left-leaning governments prefer to boost domestic credit to the public sector. In a further analysis, we show that political parties and their domestic credit strategies remain unchanged even during electoral periods. Our novel insights, that are robust to alternative measures, samples, and a set of econometric identifications, contribute to the literature on partisan politics and lending behaviour.

This paper links banking system development to the colonial and legal history of African countries. Based on a sample of 40 African countries from 2000 to 2018, our empirical findings show a significant dependence of current financial institutions on the inherited legal origin and the colonization type. Findings also reveal that current financial legal institutions are not major determinants of banking system development, and that institutional development and governance quality are more important. A high share of government spending relative to GDP also positively affects banking system development in African countries.

The decade of the 1880s was a turbulent period for the French Third Republic. Corruption scandals that discredited republican parties and a lacklustre economic performance after the Paris Bourse crash of 1882 gave rise to widespread public disenchantment with the republican political elites. The rise of the Boulangist movement was the most representative example of this disillusionment. In 1887, Georges Boulanger, an army general and former minister of war, began orchestrating a populist mass campaign against the ruling republicans and the parliamentary regime. His political agitation, supported by a heterogeneous coalition of socialists, radicals and royalists, reached a climax in January 1889, when, after winning a Paris by-election, he had an opportunity to stage a coup d’état, which did not materialise. To understand whether French investors perceived the Boulangist campaign as a real threat to their interests, I use an original dataset of daily stock prices to analyse the effect of the January 1889 by-election on the value of politically connected firms listed on the Paris Bourse. The results show that firms with links to the republican parties experienced positive cumulative abnormal returns after Boulanger's refusal to stage the coup, while there was no effect on firms connected to the royalist parties or with no political ties. These findings suggest that French investors reacted positively to the prospective subsiding of the Boulangist movement.

Capital regulation is critical to address distortions and externalities from intense conflicts of interest in banking and from the failure of markets to counter incentives for recklessness. The approaches to capital regulation in Basel III and related proposals are based on flawed analyses of the relevant tradeoffs. The flaws in the regulations include dangerously low equity levels, a complex and problematic system of risk weights that exacerbates systemic risk and adds distortions, and unnecessary reliance on poor equity substitutes. The underlying problem is a breakdown of governance and lack of accountability to the public throughout the system, including policymakers and economists.

The impact of private benefits extraction on the values of oligopolistic firms is analyzed. Private benefits are assumed to generate costs which are passed through the organizational structure and create price distortion in the downstream product market. We prove that this may affect the profit (i.e. the market value) of the firms in a positive sense since the intensity of rivalry is curbed by the cost increase.

In oligopoly, private benefits extraction may enhance the profits while still generating a welfare loss: this suggests that corporate governance cannot be divorced from competition policy in industries where managerial opportunism generates expropriation costs.

Trust allows financial transactions to take place when contracts are incomplete and the cost of negotiating too great for the parties involved. Banking covers many different types of transactions in assets with different levels of incomplete contracts. Investment banks have traditionally dealt with assets with incomplete contracts and often traded on informal and opaque markets. The creation of new global banks combined know-how, capital and collateral to generate enormous growth in these markets. While global banks developed trust with counterparties in specific markets, the opacity combined with limited liability structures also created principal-agent problems. The scandals which emerged are a reflection of these agency problems and have left trust in the banks greatly diminished. If levels of trust remain so low, this will be consistent with ongoing bank vulnerability, less lending to finance risky but profitable investment projects, and consequently lower economic activity. Regulation can support private incentives to accept codes of conduct which enhance trust.

The present paper develops a two-period, simple model of interbank competition based on the idea that banks can partially control the behaviour of borrowers. The control effort by one bank over its customers is not observable by competitor banks. It is shown that the equilibrium behaviour of banks is characterised by a distorted incentive to exert the control effort. A second implication of the model is that unexpected tightening of the interest rate policy by the Central Bank increases the banks’ liabilities and thereby influences their loan policy. It is also shown that the returns from control are lower if banks expect that the economy be hit by a negative shock.