Politics And Credit Allocation - Slides
Speaker(s) Prof. Anjan Thankor Publication RBI Main Bldg. – 1st Floor, New Conference Room

We develop a model in which political influence on credit allocation elicits bank capital responses. The model generates three hypotheses that we test empirically. 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 politically-favored lending, and household consumption consequently increases. Third, these banks exhibit poorer post-lending performance. Our study has implications for the interaction between politics, consumption, systemic risk, and financial stability through a specific channel—the interplay between credit-allocation regulation and bank capital structure.

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