This paper examines the effects of government ownership on bank lending behavior using data on state-owned banks in Italy, where state-owned banks account for more than 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 firms can borrow more from privately owned banks. State-owned banks also favor large firms and those located in depressed areas. The lending behavior of state-owned banks is influenced by the political affiliation of the bank and the electoral results of the party associated with the bank: the stronger the political party in the area where the firm is borrowing, the lower the interest rates charged. The study compares the interest rates charged by state-owned and privately owned banks to firms with identical risk profiles. It finds that, all else equal, state-owned banks charge lower interest rates than privately owned banks, with an average difference of about 44 basis points. This difference is attributed to the political view of state ownership, where state-owned banks provide loans to political supporters and favor firms in areas with more political patronage. The results also show that state-owned banks are more inclined to favor large enterprises, which is consistent with the political view. The study also finds that the lending behavior of state-owned banks is affected by the electoral results of the party affiliated with the bank. The stronger the political party in the area where the firm is borrowing, the lower the interest rates charged. This result is robust to including both bank and firm fixed effects. Overall, the results support the political view of government ownership, suggesting that state-owned banks serve as a mechanism to supply political patronage. The findings indicate that government ownership of banks has distorting effects on the financial allocation of resources, which is consistent with findings that widespread state ownership of banks is correlated with poor financial development. The study also highlights the importance of political factors in shaping bank lending behavior and the potential negative effects of a highly politicized allocation of financial resources on productivity and growth.This paper examines the effects of government ownership on bank lending behavior using data on state-owned banks in Italy, where state-owned banks account for more than 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 firms can borrow more from privately owned banks. State-owned banks also favor large firms and those located in depressed areas. The lending behavior of state-owned banks is influenced by the political affiliation of the bank and the electoral results of the party associated with the bank: the stronger the political party in the area where the firm is borrowing, the lower the interest rates charged. The study compares the interest rates charged by state-owned and privately owned banks to firms with identical risk profiles. It finds that, all else equal, state-owned banks charge lower interest rates than privately owned banks, with an average difference of about 44 basis points. This difference is attributed to the political view of state ownership, where state-owned banks provide loans to political supporters and favor firms in areas with more political patronage. The results also show that state-owned banks are more inclined to favor large enterprises, which is consistent with the political view. The study also finds that the lending behavior of state-owned banks is affected by the electoral results of the party affiliated with the bank. The stronger the political party in the area where the firm is borrowing, the lower the interest rates charged. This result is robust to including both bank and firm fixed effects. Overall, the results support the political view of government ownership, suggesting that state-owned banks serve as a mechanism to supply political patronage. The findings indicate that government ownership of banks has distorting effects on the financial allocation of resources, which is consistent with findings that widespread state ownership of banks is correlated with poor financial development. The study also highlights the importance of political factors in shaping bank lending behavior and the potential negative effects of a highly politicized allocation of financial resources on productivity and growth.