Political Borders and Bank Lending in Post-Crisis America*

Abstract

We study political influences on private banks receiving government funds. Using spatial discontinuities associated with congressional district borders, we show that recipient banks of the 2008 Troubled Asset Relief Program (TARP) program increased mortgage and small business lending by 23–60% more in census tracts located just inside their home-representative’s district than just outside; the effect also shows up in higher loan acceptance rates, and mortgages more likely to be impaired or in default. The effect is stronger when the representative voted for TARP, is politically powerful, connected to the financial industry, and when the bank is important in the district. These findings suggest that obtaining public funds subjects firms to political influences, which affects the quantity and quality of corporate investment because of political considerations.

Do Business Borrowers Benefit from Bank Bailouts?: The Effects of TARP on Loan Contract Terms

“…As briefly noted above, a number of studies examine the effects of bailouts on the quantity of credit (i.e., the credit supply at the extensive margin) and reach conflicting results. Berrospide and Edge (), Li (), Puddu and Wälchli (), Chavaz and Rose (), Berger and Roman (), and Chu, Zhang, and Zhao () find that TARP banks expanded their quantities of credit. Black and Hazelwood () find mixed results.…”

Lending Cycles and Real Outcomes: Costs of Political Misalignment

“…In particular, our baseline estimates merge domestic private and foreign banks into a single private category. However, recent research suggests that private banks are also subject to political pressure (Akey et al, 2017;Chavaz and Rose, 2018). In our context, one may conjecture that domestic private banks are also subject to the central government's political influence, and foreign banks less so.…”

“…Second, we explore whether there are other demand factors correlated with the election cycle. In particular, the behaviour of private firms and banks can be politically influenced if they benefit from public funds (Carvalho, 2014;Chavaz and Rose, 2018). It is possible that the central government engages in a re-allocation of public contracts, investment or funds around local elections that favour its allies and punishes opponents.…”

“…We use cross-sectional variation in electoral competition and political alignment across localities to identify elements of tactical redistribution and rule out alternative explanations. On the one hand, private banks may also be subject to political influence (Chavaz and Rose, 2018;Akey et al, 2017) and they may respond to competition from state banks. In that case, our estimations constitute a lower bound for the true size of the political cycle in politically aligned regions.…”

The Political Economy of Multilateral Lending to European Regions

“…Finally, this paper is related to a field in financial economics studying whether political considerations influence credit allocations of government-owned banks. This literature finds that, unlike private banks, lending by government-controlled banks is likely to follow political business cycles and to flow to electorally important districts both in advanced (e.g., Chavaz and Rose (2019) and Englmaier and Stowasser (2017) with evidence on US and Germany, respectively) and in less developed countries (among others, see Carvalho 2014, Cole 2009, Dinc 2005, for evidence on Brazil, India and a set of 36 countries, respectively). 8…”