Central Bank Intervention and the Role of Political Connections

Abstract

This paper analyzes the characteristics of banks that received emergency loans from the Federal Reserve during the recent financial crisis. Using unique data consisting of emergency loan transactions, I provide evidence that larger banks, in terms of assets and market capitalization, were more likely to receive emergency support. I also show that banks that held more loans, deposits, and investment securities as assets, as well as banks with higher share prices, greater stock trading activity, and more market risk, were more likely to receive support. After controlling for balance sheet characteristics and other measures of bank riskiness, I provide strong evidence that banks that were politically connected?either through lobbying efforts or employment of politically connected individuals?were substantially more likely to receive emergency support from the Federal Reserve. In economic terms, the Federal Reserve was 10?17 percent more likely to give emergency loans to banks that were politically connected than to banks that were not politically connected.