Related Lending

Abstract

In many countries, banks lend to firms controlled by the bank's owners. We examine the benefits of related lending using a newly assembled data set for Mexico. Related lending is prevalent (20 percent of commercial loans) and takes place on better terms than arm's-length lending (annual interest rates are 4 percentage points lower). Related loans are 33 percent more likely to default and, when they do, have lower recovery rates (30 percent less) than unrelated ones. The evidence for Mexico in the 1990s supports the view that in some important settings related lending is a manifestation of looting.