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bank lending

The political economy of bank lending: evidence from an emerging market

Claudia Ruiz's picture

Our paper studies the existence of political rents in bank lending in Mexico. Unlike prior studies examining political rent seeking in public sector banks, we focus on an economy with a fully privatized banking sector where the existence of political rent seeking is not obvious.

The data that we use corresponds to the universe of commercial bank loans in Mexico from 2003 to 2012. We classify firms as politically connected if they are located in a state that elected a senator who at a particular time chaired an important senate committee. 1 We then narrow down our definition of political connection by focusing on firms that, in addition to being headquartered in the same state, operate in an industry related to the purview of the chairman’s commission, or are located in the same municipality in which the chairman lives. Having this classification of political connection allows us to exploit within-firm variation over time, and compare a firm’s loan terms and performance when it is politically connected and when it is not.

Did the Reserve Requirement Increases of 1936–1937 Reduce Bank Lending? Evidence from a Natural Experiment

Haelim Park's picture

The recession of 1936–37 was one of the most severe recessions in economic activity in the history of the United States. This sharp but short-lived recession occurred while the U.S. economy was recovering from the Great Depression of 1929–1932. After expanding for 50 months, from March of 1933 to May 1937, real GDP fell by 11 percent from May 1937 to June 1938. Industrial production fell by a staggering 32 percent.

The recession was preceded by increases in reserve requirements for Federal Reserve member banks. In 1936–37, the Federal Reserve became worried about the large level of excess reserves in the banking system, and considered them an inflationary threat. The Federal Reserve doubled reserve requirements as an insurance policy against this threat. The first increase came on August 16, 1936. The Federal Reserve increased reserve requirements again on March 1, 1937 and a third and final time on May 1, 1937. After the third increase, reserve requirements had doubled from the levels they had been from June 21, 1917 to August 1936. Due to the timing of the two events, the recession and the reserve requirement increases, scholars have debated whether the Federal Reserve’s reserve requirement increases of 1936–37 reduced bank lending and engendered the economic recession of 1937–1938. In a new paper, Patrick Van Horn (Southwestern) and I test whether the Federal Reserve’s increases in reserve requirements reduced bank lending.