Defunding Controversial Industries: Can Targeted Credit Rationing Choke Firms?

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See all articles by Kunal Sachdeva

Kunal Sachdeva

Rice University - Jesse H. Jones Graduate School of Business

André F. Silva

Board of Governors of the Federal Reserve System

Pablo Slutzky

University of Maryland - Robert H. Smith School of Business

Billy Xu

Rice University - Jesse H. Jones Graduate School of Business

Date Written: November 9, 2022

Abstract

This paper examines whether targeted credit rationing by banks can disrupt the operations of firms likely to generate negative externalities. We exploit a major regulatory initiative in the United States–Operation Choke Point–which targeted bank relationships with firms in industries with a high risk for fraud and money laundering. Using supervisory loan-level data, we find that targeted banks reduce lending and terminate relationships with affected firms. However, these firms fully compensate by substituting lending from non-targeted banks at similar terms, resulting in no changes in total debt, investment, or profitability. Our results suggest that targeted credit rationing fails to promote change.

Keywords: bank-firm relationships, credit rationing, social-oriented banking

JEL Classification: G21, G28, G30, G38, D62

Suggested Citation

Sachdeva, Kunal and Silva, André F. and Slutzky, Pablo and Xu, Billy, Defunding Controversial Industries: Can Targeted Credit Rationing Choke Firms? (November 9, 2022). Available at SSRN: https://ssrn.com/abstract=

Kunal Sachdeva (Contact Author)

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

HOME PAGE: http://kunalsachdeva.com

André F. Silva

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Pablo Slutzky

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

Billy Xu

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
Houston, TX 77005-1892
United States

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