Relationship Lending in All Its Forms
Paper Session
Friday, Jan. 6, 2023 10:15 AM - 12:15 PM (CST)
- Chair: Scott Frame, Federal Reserve Bank of Dallas
Reaching for Influence: Do Banks Use Loans to Establish Political Connections?
Abstract
We explore whether banks use loans as a tool for political influence. Using close elections as our setting, we show that firms linked to members of Congress receive lower interest rates on new loans, which are also larger and have fewer covenants. Such firms, however, do not experience improvements in future performance or reductions in default risk. The impact of political connections is greater for important politicians, for firms that are large contributors, and when both are from the same state. Consistent with banks seeking influence through preferential lending to politically connected firms, the effect is also stronger for banks with regulatory problems, during the TARP period, and for banks with a history of bailouts. Furthermore, such banks lend more frequently to connected firms.Bank Information Production Over the Business Cycle
Abstract
The information banks have about borrowers drives their lending decisions and macroeconomic outcomes, but this information is inherently difficult to analyze because it is private. We construct a novel measure of bank information quality from confidential regulatory data that include banks' private risk assessments for US corporate loans. We show that our measure of information quality improves as local economic conditions deteriorate, particularly for newly originated loans and loans with greater information sensitivity. Our results provide empirical support for theories of countercyclical information production in credit markets, and suggest that policies designed to stimulate macroeconomic activity through the banking sector may be less effective in recessions.Zombie Lending to U.S. Firms
Abstract
We provide the first empirical evidence that zombie firms---highly levered firms with weak growth prospects---are not a prominent feature of the U.S. economy and that U.S. banks do not lend to such firms. Using confidential supervisory data on firm-bank relationships during the 2014--2019 period, we estimate that zombie firms are few in number and operate predominantly in declining industries. Banks---including the weakly capitalized ones---reduce their exposure to firms that transition into zombie status, charge zombie firms higher loan rates, and assess these firms as having higher default probability. Likely as a result, zombie firms exit the market through bankruptcy at a faster rate than other firms. To sharpen the causal interpretation of our findings, we exploit the sudden and sizeable drop in global oil prices in 2014--2015 as a natural experiment to identify levered firms that transition into zombie status and banks that suffer loan losses on their balance sheets. In contrast to existing findings for other countries, our evidence suggests that in the United States bank lending is not a key driver of zombie firms' proliferation and survival.Discussant(s)
Christopher M. James
,
University of Florida
Ashleigh Eldemire-Poindexter
,
University of Tennessee
Lars Norden
,
Getulio Vargas Foundation and EBAPE
Viral V. Acharya
,
New York University, CEPR, and NBER
JEL Classifications
- G2 - Financial Institutions and Services
- G4 - Behavioral Finance