DP11595 Political Borders and Bank Lending in Post-Crisis America

Author(s): Matthieu Chavaz, Andrew K Rose
Publication Date: November 2016
Keyword(s): congress, county, data, district, effect, empirical, fixed, mortgage, panel, policy
JEL(s): F36, G28
Programme Areas: International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11595

We use spatial discontinuities associated with congressional district borders to identify the effect of political influences on American banks' lending. We show that recipients of the 2008 public capital injection program (TARP) increased mortgage and small business lending by 23% to 60% more in areas located inside their home-representative's district than elsewhere. The impact is stronger if the representative supported the TARP in Congress, was subsequently re-elected, and received more political contributions from the financial industry. Together, these results suggest that political considerations influence credit allocation in a politically mature system like the United States without the formal possibility of political interference in lending decisions, and that this influence is larger if the flows between banks and politicians are reciprocal.