Defunding Controversial Industries: Can Targeted Credit Rationing Choke Firms?

56 Pages Posted: 8 Dec 2022 Last revised: 22 Aug 2023

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

University of Rochester - Simon Business School

Date Written: August 21, 2023

Abstract

This paper examines the effects of targeted credit rationing by banks on firms likely to generate negative externalities. We exploit an initiative of the U.S. Department of Justice, labeled Operation Choke Point, which compelled banks to limit relationships with firms in industries prone to fraud and money laundering. Using supervisory loan-level data, we find that, as intended, targeted banks reduce lending and terminate relationships with affected firms. However, most firms fully substitute credit through non-targeted banks under similar terms. Overall, the performance and investment of these firms remain unchanged, suggesting that targeted credit rationing is widely ineffective in promoting change.

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

JEL Classification: G21, G28, G30, G32, G38

Suggested Citation

Sachdeva, Kunal and Silva, André F. and Slutzky, Pablo and Xu, Billy, Defunding Controversial Industries: Can Targeted Credit Rationing Choke Firms? (August 21, 2023). Available at SSRN: https://ssrn.com/abstract=4273118 or http://dx.doi.org/10.2139/ssrn.4273118

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

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

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