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

Abstract

I empirically analyze how banks reallocate capital across lending markets following funding shocks. 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 five times greater in the state in which the shock occurs. Features of banking regulation (Section 109) negatively affect fund mobility and loan performance. These results suggest that state boundaries matter for capital mobility in part because of regulatory distortions.

Keywords: Financial Integration, Banking Regulation, Credit Supply, Policy Distortions, Mega Millions, Powerball

JEL Classification: G21, G28, G32