This paper examines the effects of government ownership on bank lending behavior using data on individual loan contracts in Italy, where state-owned banks account for over half of total lending. The study finds that state-owned banks charge lower interest rates than privately owned banks to similar or identical firms, even when these firms can access private funds. State-owned banks tend to favor large firms and those located in depressed areas. The lending behavior of state-owned banks is influenced by the electoral results of the political party affiliated with the bank, with stronger political parties leading to lower interest rates. These findings support the political view of state-owned banks, suggesting that they serve as mechanisms for political patronage. The results also highlight the distorting effects of government ownership on financial resource allocation, which may have negative consequences for productivity and growth.This paper examines the effects of government ownership on bank lending behavior using data on individual loan contracts in Italy, where state-owned banks account for over half of total lending. The study finds that state-owned banks charge lower interest rates than privately owned banks to similar or identical firms, even when these firms can access private funds. State-owned banks tend to favor large firms and those located in depressed areas. The lending behavior of state-owned banks is influenced by the electoral results of the political party affiliated with the bank, with stronger political parties leading to lower interest rates. These findings support the political view of state-owned banks, suggesting that they serve as mechanisms for political patronage. The results also highlight the distorting effects of government ownership on financial resource allocation, which may have negative consequences for productivity and growth.