On the Persistence of Political and Economic Institutions in Banking

This paper analyzes quantitatively whether a particular economic institution often underpinning political regime change – the influence of political connections in banking - persists over structurally different political institutions. While theory suggests that economic institutions persist over political transitions if the benefits accruing to political elites remain, quantification of the enduring influence of politics in banking has thus far been limited. Using data covering the population of Indonesian banks and their changing political connections over the democratic transition, this paper finds that while the influence of political ties on bank behavior remains unchanged over the structural change in political institutions, how political power in banking is derived changes over time. Namely, democratization results in a shift from in political ties in banking from those with formal to informal political influence. While the political influence in banking is formerly concentrated more in officials with formal government positions, bank behavior is more influenced by elites with informal political positions after democratization. While an intent of political regime change may be to dismantle the influence of this underlying economic institution, these results suggest a model of captured democracy whereby the influence of political elites persists regardless of changes to political institutions. From a practical perspective it also suggests that changes in political influence will not dismantle the politics-banking channel, but rather result in banks shifting to less transparent ties.