Ever wonder if your bank set up your local branch as part of a political quid pro quo? Maybe not, but a new study by experts at Wharton and elsewhere brings circumstantial evidence to support such a suspicion. New bank branches bring not just capital investments and jobs, but also bragging rights for candidates from the districts where those branches are located. Winning candidates could return favors if they sit on a powerful federal committee that weighs in on bank regulation, penalties, and such.
In a recent research paper titled “The Strategic Use of Bank Branches for Political Influence,” Wharton accounting professor Allison Nicoletti and her co-authors analyze empirical data to make their case. Their study found a nexus between big banks that could use a lighter regulatory touch, and the specific locations of new bank branches they set up. Nicoletti’s co-authors are accounting professors Mihir N. Mehta of the University of Chicago’s Booth School of Business and Wanli Zhao of Bocconi University in Italy.
“It’s not as if these branches aren’t profitable or that they’re bad branches,” Nicoletti said. “It’s just that they’re not the absolute best profit-maximizing branch that a bank could have opened absent the political incentives.”
“Highly scrutinized banks strategically establish new branches in the districts of House Financial Services Committee (HFSC) members immediately before elections,” the researchers wrote in their paper. “Following these strategic branch openings, affected HFSC members’ districts experience greater increases in credit access, and scrutinized banks are less likely to face enforcement by regulators overseen by the HFSC.”
How the Favor Bank Works
The paper’s sample covered new branches set up between 2004 and 2018 by 917 banks with assets of more than $1 billion. Of those, the study identified 10 to 13 banks as “politically motivated,” defined by specific criteria the authors framed. The chosen study period avoids the COVID-era influences on bank branch openings and closures.
Using a set of proxies, the study estimated the number of politically motivated branch openings at between 5.3% and 7.5% of all branch openings in pre-election quarters. “In terms of percentage, I think that’s significant,” Nicoletti said. This range is based on a calculation of branches per election cycle across eight election cycles in the sample divided by the total number of pre-election branch openings during that period. The study also estimated that these banks opened between 10 and 14 new branches in every election cycle.
The data covered 47,166 bank-districts with 1,503 branch openings between 2004 and 2018. Of those, 6,861 bank-districts and 374 new branches were in HFSC represented districts. Republicans and Democrats had roughly equal representation on the HFSC during the study period.
The Cost-Benefit Equation of Political Patronage
The politically motivated banks set up those new branches at a cost of approximately $2.5 million each, or between $25 million and $35 million per election cycle in the study sample period. Those expenditures are “comparable to the banking sector’s expenditures on other influencing efforts,” the paper noted.
“[The politically motivated banks] are targeting the HFSC members that have the most power, and those who carry the most weight. They’re the ones that are hopefully going to be able to get things done.”— Allison Nicoletti
Enforcement actions have varying levels of severity, including cease and desist orders (severe actions) and sanctions against personnel (non-severe actions), the paper noted, citing prior research. The study looked at both severe and non-severe actions across its sample. It found that politically motivated banks are 19.9 percentage points less likely to receive an enforcement action from the Office of the Comptroller of the Currency (OCC) in the following year.
Politicians value new branches in their electorates because of the positive economic effects that arise from increased access to credit for residents, the paper stated. It studied district-level loan issuance activity to validate that branches can help improve local area credit access. It found that in the year after an HFSC district has a pre-election branch opening, the number of originated loans is larger than that for districts with only pre-existing bank branches.
Why Big Banks Are Politically Motivated
It helps the biggest banks to have friends in government because they are subject to the most regulatory scrutiny, Nicoletti pointed out. “Even after adjusting for their size, the big banks spend twice as much on political contributions as the next largest banks,” she said. And, devices such as bank branches are especially useful because they allow banks to circumvent restraints such as caps on contributions to candidates in federal elections, she added.
Banks could benefit from political influence, including favorable legislation, insurance to facilitate risk-taking, or protection against enforcement, the paper stated.
It cited the composition of the 113th Congress (2013-2014) to show how political blessings make business sense for a bank. In that Congress, the Republican Party had a majority in the House, and the HFSC had 33 Republican and 28 Democrat representatives. “Under the assumption that committee votes are typically cast along party lines, banks could stymie legislative action by convincing three Republicans to vote against any proposed bill,” the researchers pointed out.
The HFSC is one of the larger committees in Congress, Nicoletti noted. During the study’s sample period, the number of HFSC members ranged from 59 to 73, depending on the composition of each Congress.
The politically motivated banks seemed to target the most senior members of the HFSC, Nicoletti noted. “They are targeting the HFSC members who have the most power, and those who carry the most weight. These people are the ones who are hopefully going to get things done.”
The paper noted that over the past 50 years, incumbents in the U.S. House of Representatives seeking reelection kept their seats over 90% of the time. It added that banks seek favors from the most senior politicians because they have often entrenched themselves and face even lower risks of losing elections.
Politically motivated banks also seek relationships with politicians on the Senate Committee on Banking, Housing, and Urban Affairs, but senators represent an entire state. The study found no evidence that politically motivated banks are more likely to open branches in the states of members of the Senate Committee on Banking.
Why the Study Is Relevant Now
According to Nicoletti, their paper is the first to study the quid pro quo between new bank branches and regulatory scrutiny. She said their paper has increased relevance in the current banking environment, where calls for transparency have increased after the 2023 collapse of Silicon Valley Bank and the regional banking crisis that followed. The paper sheds light on a type of political lobbying (new bank branches) that is not easily observable, she said.
Besides the OCC, the regulatory landscape for banks includes the Federal Deposit Insurance Corporation and the Federal Reserve Bank. “You want regulators to be independent, but they must answer to politicians perhaps connected to a bank, so it’s a bit of a web,” Nicoletti said.
