Political Influence On Bank Credit Allocation: Bank Capital Responses, Consumption And Systemic Risk
Speaker(s) Prof. Anjan Thakor Publication Reserve Bank of India, Central Office, 15th Floor, Conference Room - 1

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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