Local Public Corruption and Bank Lending Activity in the United States

Abstract

Using a conviction-based measure, we find that local (state-level) public corruption exerts a negative effect on the lending activity of US banks. Our baseline estimations show that the difference in public corruption between, for example, Alabama, where corruption is high, and Minnesota, where corruption is low, implies that banks headquartered in the former state grant 0.55% less credit (or $3.52 million for the average bank) ceteris paribus. Using proxies for relationship lending and monitoring, we also find that these bank characteristics weaken the negative effect of public corruption on lending. These results are robust to tests that address endogeneity, to the use of perception-based measures of corruption, and after controlling for credit demand conditions. In further analysis, we show that these effects are more evident for smaller banks and banks operating in a single state. These findings provide evidence that public corruption could facilitate information asymmetry in the lending market and, thus, could hinder local development by reducing bank credit.

Governance and Access to Finance

“…Developed countries also face corruption issues, where institutional quality is considered higher. Public corruption decreases bank lending activity of US commercial banks for the 1995-2013 period (Bermpei, et al, 2019). The authors also provide evidence that proxies for relationship lending and monitoring weaken the negative relationship between public corruption and lending activity.…”

Modeling Political Corruption in Spain

“…Political corruption risk consequences are numerous, starting with economic ones as they involve more reluctance from investors to flow capitals in unstable political environments, but are also negative for industry in general and social development [50], and are particularly relevant for the Spanish economy because tourism is one of the main economic engines of Southern Europe that is negatively affected by political corruption [103]. Combating public corruption can not only directly improve Spanish business performance, but can also facilitate it via access to credit [27]. It is also necessary to distance political and managerial spheres.…”

“…In general, foreign direct investments decrease [19][20][21], and national firms' value drops [22][23][24][25]. Thus, industry must pay more to lenders given the perceived political instability impacting the credit market [26][27][28]. At those countries where the state institutions are weaker, corruption is often linked to violence, whereas in the so called mature democracies, corruption means the increase of economic and social insecurity and also the opportunity for the privilege to get richer at the expense of everyone else [29] Hence, literature has analyzed the types of political corruption, its causes or consequences from a theoretical perspective or even empirically focusing on indicators built using historical information.…”

Identification of corruption risks in the banking sector of the economy

“…According to Bermpei and Kalyvas (2020) research of US banking activities at the state level, public corrupt practices have the greatest demolishing impact on the mortgage market, which directly affects budgets of local governments. In this regard, Pasiouras (2006) research of bank regulation and law enforcement in 857 banks in 71 countries regarding to global activity index is significantly important.…”