In this note we document political lending cycles for German savings banks. We find that savings banks on average increase supply of commercial loans by €7.6 million in the year of a local election in their respective county or municipality (Kommunalwahl). For all savings banks combined this amounts to €3.4 billion (0.4% of total credit supply in Germany in a complete electoral cycle) more credit in election years. Credit growth at savings banks increases by 0.7 percentage points, which corresponds to a 40% increase relative to non-election years. Consistent with this result, we also find that the performance of the savings banks follows the same electoral cycle. The loans that the savings banks generate during election years perform worse in the first three years of maturity and loan losses tend to be realized in the middle of the election cycle.

The results are consistent with political interference in the credit policies of savings banks in Germany. It is consistent with a number of features of the governance of the savings banks, which are consistent with political interference.

1. Local credit supply: German savings banks were stablished with the mandate to provide small and medium sized businesses with their financing needs, in order to support local business and employment. Savings banks are limited by law to lend only in their own local market, generally a city ("Stadtsparkasse") or a county ("Kreissparkasse").
2. Prominent role of local politicians: Local politicians occupy prominent positions within the board of directors (Sparkassenverwaltungsrat) and also the central credit committee (Kreditausschuss) in their local savings bank. Based on county regulations, the chairman of both bodies is the political representative of the county, in most cases the mayor or the county commissioner (Landrat). The positions entail significant influence on lending decisions: At each savings bank, loans larger or riskier than a certain threshold need approval from the board members or the central credit committee. This set of tools enables the local politicians to follow their political motives via distorting banks' lending policies.

The local restriction of activities, combined with the substantial influence of local politicians on savings banks' credit decisions, suggest that the use of the banks for political purposes is possible. Our empirical results show that politicians actively make use of their position to their own political advantage by granting more loans and loans at more favorable terms in the year when elections in their community take place. The evidence is also consistent with evidence from politically controlled banks in other countries.1 The governance structure of German savings banks may hence induce political lending cycles, a misallocation of capital and also result in distortions of the electoral process.