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Liquidity Hoarding and Politics: The Role of Elections

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Abstract

Using data for 1992–2020, the paper assesses the role of elections on liquidity hoarding by Indian commercial banks. The findings reveal that liquidity hoarding typically increases during election years, driven primarily by an increase on the asset side of their balance sheet. Such behaviour manifests mainly for public and private banks and much less for foreign banks. The evidence also indicates a cyclical pattern in the evolution of liquidity hoarding, such that it increases in the run-up to the elections.

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Data availability

The data is sourced from publicly available sources as mentioned in the text and available upon reasonable request.

Notes

  1. Disaggregated OBS data is reported from 1999 onwards.

  2. The evidence of liquidity hoarding around election years is not contrary to the observation that banks over-extend credit to certain sectors during these periods. To illustrate, banks might be providing loans to certain sectors (liquidity depletion) at the cost of cutting back loans to other segments (liquidity hoarding) and holding the proceeds as liquid assets such as cash and/or securities (liquidity hoarding). It is also possible that corporates increase their cash holdings during elections (Jens and Page 2022) by cutting back on investment (Julio and Yook 2012), which is parked with banks (liquidity hoarding). I am grateful to an anonymous referee for highlighting this possibility.

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  1. Qatar Central Bank, ABJ Street, Doha, Qatar

    Saibal Ghosh

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  1. Saibal Ghosh
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Correspondence to Saibal Ghosh.

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Ghosh, S. Liquidity Hoarding and Politics: The Role of Elections. J. Quant. Econ. 22, 1–23 (2024). https://doi.org/10.1007/s40953-023-00378-3

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