Reaching for influence: Do banks use loans to establish political connections?

Using close elections as an empirical setting, this paper examines the drivers and consequences of politically motivated lending by U.S. banks, with a special focus on resulting benefits. We first show that firms with ties to members of Congress receive more favorable loan terms, despite no observable improvements in performance or default risk. The effect is especially pronounced among banks facing regulatory challenges — such as FDIC enforcement actions, corporate misconduct investigations, or low Community Reinvestment Act ratings — which also lend more frequently to connected firms, suggesting that these institutions have a heightened demand for political influence. Crucially, we find that politically motivated lending produces tangible future benefits for banks, including reduced misconduct penalties and easier approval for mergers and acquisitions. These findings provide evidence of a quid pro quo dynamic: banks extend preferential credit to firms with political connections and, in turn, receive regulatory advantages.