Political Influence, Bank Capital, and Credit Allocation

Sheng Huang () and Anjan V. Thakor ()
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Sheng Huang: China Europe International Business School (CEIBS), Pudong, Shanghai 201206, China
Anjan V. Thakor: WFA Center for Finance and Accounting Research, Olin School of Business, Washington University, St. Louis, Missouri 63130; European Corporate Governance Institute (ECGI), 1000 Bruxelles, Belgium

Management Science, 2024, vol. 70, issue 11, 8134-8162

Abstract: Political influence on bank credit allocation is often viewed as being necessary to address social problems like income inequality. We hypothesize that such influence 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 risk through a specific channel—the interplay between credit-allocation regulation and bank capital structure.

Keywords: politics; bank regulation; capital requirements (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:70:y:2024:i:11:p:8134-8162

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