Credit, cronyism, and control: Evidence from the Americas

I examine the effects of corruption and government control of the banking system for 18 Western hemisphere countries on the sensitivity of commercial lending rates to changes in international financial conditions and find that most countries' lending rates are insensitive to these conditions. Only the least corrupt nations exhibit a significant positive relation between lending rates and international financial conditions. The responsiveness of these lending rates is nonlinearly related to corruption and government control of the banking sector. The findings suggest that both corruption and government control of banks need to be considered when analyzing international credit markets.