Trapped Deposits, Capital Mobility, and Regulation Frictions: Evidence from U.S. Lottery Winners

Abstract

I empirically analyze how funding shocks propagate throughout banks’ internal capital markets. I exploit a new source of quasi-experimental variation in bank funding from lottery winners. Exposure to jackpot shocks leads to a significant increase in both deposits and lending at the bank level. Funds are transmitted across markets, but allocations are four times greater in the state where the shock occurs. Features of banking regulation (Section 109) negatively affect capital mobility and loan performance. Results suggest that banks distribute capital across markets, consistent with efficient resource allocation, but that state boundaries matter for fund mobility because of regulatory frictions.

Keywords: credit supply, internal capital markets, financial integration, banking regulation

JEL Classification: G21, G28, G32