Politically Connected Banks: Rent Seeking or Enjoying the Quiet Life?

The detrimental impact of policy uncertainty has drawn regulators’ attention in the aftermath of the financial crisis. For a sample that include all commercial banks and savings associations in the US between 1985 and 2013 our estimates show that in times of high policy uncertainty banks are more conservative in lending and also that political connections can mitigate this adverse effect. A one standard deviation increase in policy uncertainty leads to an almost seven percent decrease in connected banks’ loan loss provision ratios. The mitigation role of political connections is mainly present among smaller banks and in periods of strict banking regulation.