Can political competition provide more public financial services? Evidence from Turkish state-owned banks

Banks are the heart of the financial system. They mitigate macroeconomic and financial shocks and enhance economic stability. Banks also play a leading role in providing financial services to underserved people. The World Bank Global Findex Database 2017 shows that 69% of adults around the world have an account in a formal financial institution, where the banks constitute the vast majority along with other regulated financial institutions. In that sense, banks play a significant social role in economic development.

Unlike private banks, profit maximization is not the primary motive for state-owned banks. The social role of promoting financial development, especially in areas that are not served by private banks, is presented as one of the rationales for state ownership of banks. But, at the same time, state ownership of banks makes them more open to political influence. Therefore, the political determinants of bank branching are an important issue, especially for countries where state-owned banks form a large share of the formal financial sector.

In my recent research study, I explore the role of the influence of spatial factors in the policy-making process over the course of political cycles and focus on whether selective opening of bank branches can turn into a political opportunity. Examining the change in the number of bank branches, I argue that the central government can focus on the allocation of physical public investments before elections to increase its share of the votes. Contributing to the literature on the political allocation of public resources, my results show that electorally competitive cities benefit from the delivery of physical public goods—state-owned bank branches in this case. 

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State-Owned Banks as Visible Public Goods

How do banks relate to political opportunity? I argue that the visibility of banks matters. Not all state actions and investments provide similar visibility in terms of demonstrating to the public an improvement in the provision of public goods. When authorities allocate resources to less tangible and more complex issue areas, such as improving education or the health care system, the results might be less visible to the public.

On the other hand, delivering public goods and services with a higher degree of visibility, such as fixing potholes or opening new banks, not only convinces voters that the incumbent works, but also signals their potential. Public goods that are of high salience to the voters do not need additional advertisement. Even citizens who might not use those services note their presence and that might affect their vote. Moreover, unlike building roads and highways, opening a state-owned bank branch does not require a long procedure, time, or infrastructure. The governing party can easily rent, buy, or use a building and turn it into a bank branch.

How Does Political Competition Matter?

I look into the impact of political competition on the spread of bank branches in 81 cities in Turkey from 1961 to 2016. Using city-year-level data for the number of bank branches for 188 banks and 14 nationwide election results, I show that cities in which elections were won by a lower margin of victory are more likely to enjoy an increase in the number of state-owned bank branches.  The number of state-owned bank branches increased by one on average in those cities. This impact is larger under single-party governance compared with the coalitions. For instance, high competition led to a net change of three state-owned bank branches on average for the recent single-party period of 2002–16.

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