Defunding Controversial Industries: Can Targeted Credit Rationing Choke Firms?
41 Pages Posted:
Date Written: November 9, 2022
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
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