Political Influence, Bank Capital, and Credit Allocation

Political Influence, Bank Capital, and Credit Allocation

Sheng Huang, Anjan Thakor

Series number :

Serial Number: 

Date posted :

December 24 2022

Last revised :

December 24 2022
SSRN Share


  • politics • 
  • bank regulation • 
  • capital requirements

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.


Real name:
Sheng Huang
Real name:
Research Member
John M. Olin School of Business, Washington University, St. Louis