Paper: Consumer Access to Credit Decreases in States Whose Senators Become Powerful

Pat Akey of the University of Toronto – Rotman School of Management, Rawley Heimer of the Boston College – Department of Finance, and Stefan Lewellen of the London Business School have written Politicizing Consumer Credit. Here's the abstract:

Using proprietary credit bureau data, we find that consumers’ access to credit decreases by 4.5 percent–8 percent when the borrower’s home-state U.S. senator becomes the chair of a powerful Senate committee. The reduction in credit access mostly affects historically credit-constrained consumers (low income and nonwhite and borrowers with poor credit scores), and is stronger in areas with less politically engaged constituents and more politically connected lenders. Additional evidence supports a “political protection” hypothesis—banks that are connected to powerful politicians consider fair-lending regulatory guidelines to be less binding. The results highlight the distinction between political power and legislative outcomes, and contrast recent findings that governments expand credit access to firms and consumers.

Here is an excerpt from the conclusion:

Moreover, the reduction in credit access mostly affects borrowers that have historically been credit constrained: consumers with low incomes and poor credit scores, and racial minorities. The results are robust to increasingly stringent geographic fixed effects as well as individual fixed effects, which account for unobserved heterogeneity in borrower quality across political constituencies.

Our results are consistent with a “political protection” hypothesis whereby banks tighten screening standards on disadvantaged borrowers once they are “protected” by a powerful homestate Senator. Consistent with this explanation, we find that the largest reductions in credit access occur in Census tracts where regulatory guidelines, such as the Community Reinvestment Act, are most likely to cause additional lending. We also find that the largest contractions in credit to disadvantaged borrowers occur in areas that are politically unengaged, while the effects are amplified in regions with a large proportion of politically-connected banks. Additionally, we find that the applicants who receive credit following political power shocks tend to be of higher observable credit quality than the applicants who receive credit prior to political power shocks. Finally, we find that banks become more profitable following these shocks. Collectively, these results suggest that increased political power causes lenders to tighten screening standards in a manner that reduces credit provision to disadvantaged borrowers.



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