Abstract

Social programs can affect the real economy not only through recipients but also through the banks that deliver them. After roughly a decade of account-based delivery in Mexico, social-program payments could have become an important source of funding for the commercial banks distributing them. We test this banking channel using two natural experiments generated by the reform of Banco del Bienestar (BdB), a public social bank that does not lend and instead invests deposits in government securities. First, BdB's staggered, policy-mandated branch rollout identifies the effects of its entry. Second, during the rollout, the government centralized social-program payments in BdB, making the shift close to reverting these transfers to cash from the perspective of private credit creation. BdB entry expands account ownership and physical infrastructure, but deters commercial banks from expanding their branch networks and erodes their deposits and credit to micro firms, with these effects concentrated among the banks that previously managed social-program deposits. Centralization then causes these banks to lose up to 14.2% of their deposits, and the lost deposits pass through to a contraction in credit supply to firms. Together, the results reveal a banking channel of social transfers through which program deposits sustain private credit.

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