Essays on banking behavior: political access and resilience

This thesis consists of three empirical studies on the US banking system. The studies can be read independently. While the first two studies employ political access to evaluate banks’ value creation and credit facilitation during the election cycle, the third study adopts ESG activities as a driver of financial performance. The first chapter, “Political Access at the Elite Level: Effects on Bank Value Creation”, examines whether banks increase their market value after gaining political access. Banks having close and direct relationships with the US president and influential White House politicians increase their value by US$6 billion. Moreover, banks that benefit more greatly from political access are more focused on market finance-based activities than on traditional intermediation. Coincidentally, these banks are less affected when the Fed enforces corrective sanctions and monetary penalties. However, banks close to incumbent politicians lose significant market value when the political party in power changes. Political access can generate much more significant economic benefits than traditional measures of political engagement. Thus, political access is a scarce and valuable resource which shareholders should consider when investing and which financial regulators should consider avoiding systemic risks. The second chapter, “With a Little Help from my Friends: Mortgage Lending around Elections”, investigates whether banks ease credit during election cycles. During a House of Representatives election year, banks with political access increase mortgage loans by US$43 billion and double-credit default risks. The increase in credit supply is particularly evident in districts with moderately-contested elections, where candidates obtain an advantage of between 10% and 30% of the total vote, unlike districts with highly-contested elections where political uncertainty prevails or districts where the candidates win with a considerable majority. Later, I discuss how banks prefer to expand credit in districts where they reap the most economic benefit; that is, in regions with reelecting incumbents, constituents belong to the demographic majority, and mortgage applications for new properties are prevalent. Finally, I argue that political access is a more robust proxy of political engagement than traditional approaches such as placing politicians on the board of directors, campaign contributions, lobbying, or the revolving door. The third chapter, “Is ESG Engagement Valuable for Banks? Resilience During COVID-19”, explores whether banks committed to social welfare were more resilient at the onset of the COVID-19 pandemic. Banks that undertook activities to improve the environment (E), social interactions (S), and governance (G) had lower market value losses—by US$4.5 million—when the stock market crashed. High ESG-scored banks enjoyed higher returns, lower volatility, and mixed financial performance at the beginning of the pandemic, but results weakened as the pandemic worsened. Figures support the stakeholder theory since banks did well by doing social good, but their environmental and governance activities did not yield the same results. My research addresses the growing trend in considering ESG activities when making investment decisions and casts doubt on whether ESG activities create bank resilience during difficult times