Banks that received bailout funds increased lending more in their home representatives' districts than outside them, according to a new study that illustrates the influence of politics on the financial system.
Recipients of government funds through the Troubled Asset Relief Program of 2008, or TARP, increased mortgage and small business lending in the district of their congressman by 23 percent to 60 percent more than they did outside it, according to the paper written by Bank of England economist Matthieu Chavaz and Berkeley professor Matthew Rose.
The paper, which was published by the National Bureau of Economic Research Monday but is not yet peer-reviewed, found that banks increased lending in their home districts even more if their congressman voted for TARP, and even more if that congressman received more political contributions from banks.
The authors conclude that their study is "evidence that political considerations influence banks' mortgage and small business lending decisions in the United States, despite the maturity of the American political and financial systems and the absence of formal possibilities for politicians to influence bank lending decisions."
They arrived at that conclusion by examining bank lending in Census tracts right next to the border of a congressional district, and comparing that lending to what happens outside the district, but within the same state. That comparison strips out factors besides congressional representation that might have influenced lending, such as business conditions or regulatory differences.
TARP, signed by President George W. Bush in October 2008 at the height of the financial crisis, ultimately disbursed $442 billion to banks, other financial institutions, and automakers. TARP and other government assistance for the financial system generated widespread popular anger.