Politicizing consumer credit

Finance

Federal Reserve Bank of Cleveland

2017

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.

Access to credit; Political protection hypothesis

17-16

Federal Reserve Bank of Cleveland

No

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