Political influence on bank credit allocation is often viewed as being necessary to address social problems like income inequality. We hypothesize that such influence affects bank governance and elicits bank capital responses. Our hypothesis yields three testable predictions, for which we find supporting evidence.
First, when banks observe election outcomes that suggest greater impending political credit-allocation influence, they reduce capital to increase fragility and deter political influence. Second, banks subject to greater political influence nonetheless increase lending that politicians favor, and household consumption consequently increases. Third, these banks exhibit poorer post-lending performance. Our study has implications for the interaction between politics, household consumption and bank governance and risk through a specific channel – the interplay between credit-allocation regulation and bank capital structure.
The fall of fascism in Italy in 1943-1944 was followed by the issuance of laws and decrees that made former fascist politicians ineligible for political...
We study the effect of firm-level political risk on wage theft. On one hand firms exposed to political risk might engage in wage theft to lower their...
Under the New Deal framework for money and payments—which had its roots in the National Bank Act of 1864—banks in the United States were governed in...