Democratic Institutions and Regulatory Privileges for Government Debt

How do democratic institutions shape financial market regulation? Focusing on the government’s fiscal motives in financial market regulation, we present a new dataset documenting policies that governments use to place their own debt in an advantageous position on financial markets. These policies, which we call borrowing privileges, commonly require that banks and institutional investors hold their own government’s debt, and take a place in-between prudential and repressive regulation. Drawing on data for 58 non-OECD countries, we document that borrowing privileges are more likely to be implemented in countries with democratic institutions. Focusing on the mechanisms for this association, we show that several characteristics typically associated with democracies – increased revenue needs from trade liberalization, political competition and transparency, and the growth of financial markets – make these policies attractive to policy-makers. We contribute to the literature on the institutional sources of financial regulation and show how governments balance the growth of financial markets with revenue concerns.