Politics in banking: does political party control impact bank risk and return?
TL;DR: In this article, the authors investigate the potential impact of political party control on bank profitability and risk and find that concentration of power in either party results in higher profits, however, risk and returns typically increase during periods of democratic control.
Abstract: Purpose
The purpose of this paper is to investigate the potential impact of political party control on bank profitability and risk. This study extends previous work by looking at overall political power with respect to party control of the House, Senate, and the Presidency.
Design/methodology/approach
This paper employs regression analysis using several different dependent measures of risk and return. The independent variables include dummies to represent political power and control.
Findings
The results indicate that political control does impact both bank returns and risk. More specifically, concentration of power in either party results in higher profits. However, risk and returns typically increase during periods of democratic control.
Originality/value
To date, no research addresses the impact of political control and party affiliation on bank risk and return. Given the importance of banks to the overall economy and financial system, this research should provide policymakers and regulators with a different perspective on bank risk and return.
Citations
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TL;DR: In this article, the impact of country's governance factors on the financial behavior and performance of financial intermediaries operating in European Union countries, by covering the period 2000-2017, was analyzed.
Abstract: The study analyses the impact of country’s governance factors on the financial behaviour and performance of financial intermediaries operating in European Union countries, by covering the period 2000–2017. Empirical evidence provided by the paper relies on a set of financial and political factors that has not been previously studied. Four indicators are jointly used as proxies for capturing the various dimensions of a country’s good governance, while 21 financial indicators represent the alternative dependent variables meant to comprehensively depict the banking sector and capital market development. Each panel regression has been controlled for country’s degree of economic development and its membership to OECD and euro-zone. The findings indicated that various dimensions of political factor caused different effects on financial sector features. Control of corruption, solid political and economic stability determine significant effects on most financial variables considered (almost two-thirds of the financial indicators considered). Even after controlling for the lagged effect of governance factors the main results hold, in that monitoring corruption, maintaining political stability and designing sound economic policies still have an impact on most financial indicators considered. Another interesting conclusion supported by the results is that not all political instability indicators are detrimental for banking and stock market functioning.
3 citations
TL;DR: In this article, the authors examined the impact of the two Americas created along the lines of political influence as it impacted bank performance over four-quarters beginning with the fourth quarter of 2019 and found that banks operating in states with republican governors produced greater profits and exhibited higher liquidity levels.
Abstract: PurposeThe paper aims to highlight differences in bank performance based on state politics during the onset of the Covid pandemic. The response to Covid pandemic created an unusual opportunity for an investigation of how politics impacts banking due to the initial response to the pandemic being heavily impacted by political affiliation states' governors and dominant parties in state legislatures. Previous research looked at impact of elections on the federal level (both executive and legislative branches) on bank risk and performance. The response to the Covid pandemic in 2020 allows for an investigation on how political influence on the state level impacted banks performance.Design/methodology/approachThe Covid pandemic was an unexpected storm that entered the United States with a vengeance in 2020, taking countless lives and ravaging the economic landscape. The response to the pandemic quickly took a political spin as republican governors showed greater reluctance to shutter business activity in hopes of slowing down the spread of the virus than their democratic counterparts. This paper examines the impact of the two Americas created along the lines of political influence as it impacted bank performance over four-quarters beginning with the fourth quarter of 2019. All US banks are split into groups based on the political affiliation of state governors and the dominant party in state legislatures to measure impact of politics on bank performance and risk.FindingsThis research finds that banks operating in states with republican governors produced greater profits and exhibited higher liquidity levels. The same results held for banks in states where both the governorship and the legislature were controlled by republicans versus banks in states where both the governor and the legislature were democratic. Interestingly, the findings present a reversal when examining banks in states led by republican governors and democratic legislatures versus banks in states with democratic governors and republican legislatures. In those instances of mixed leadership, banks in states with democratic governors tend to show greater profits, greater liquidity while demonstrating lower asset quality.Originality/valueA paper published in Managerial Finance in 2018 discussed the impact of the parties in control of the White house and the legislative branch on bank performance and risk. There have been no studies, to the author’s knowledge, that look at how states' political leadership (gubernatorial and legislative) impact on bank performance. Because the response to the Covid pandemic became a politically polarized issue, the onset of the crisis allowed for measurement of how different responses by republican and democratic state leadership impacted bank performance and risk.
References
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Posted Content•
TL;DR: The difference in returns through the political cycle is therefore a puzzle as mentioned in this paper, which is not explained by business-cycle variables related to expected returns, and is not concentrated around election dates.
Abstract: The excess return in the stock market is higher under Democratic than Republican presidencies: 9 percent for the value-weighted and 16 percent for the equal-weighted portfolio. The difference comes from higher real stock returns and lower real interest rates, is statistically significant, and is robust in subsamples. The difference in returns is not explained by business-cycle variables related to expected returns, and is not concentrated around election dates. There is no difference in the riskiness of the stock market across presidencies that could justify a risk premium. The difference in returns through the political cycle is therefore a puzzle.
452 citations
TL;DR: This article conducted an empirical analysis of the relationship between presidential elections and the stock market, and found that the average excess return of the valueweighted CRSP index over the three-month Treasury bill rate has been about 2 percent under Republican and 11 percent under Democratic presidents with an average diierence of 9 percent per year.
Abstract: The excess return in the stock market is higher under Democratic than Republican presidencies: 9 percent for the value-weighted and 16 percent for the equal-weighted portfolio. The diierence comes from higher real stock returns and lower real interest rates, is statistically signi¢cant, and is robust in subsamples. The diierence in returns is not explained by business-cycle variables related to expected returns, and is not concentrated around election dates. There is no diierence in the riskiness of the stock market across presidencies that could justify a risk premium. The diierence in returns through the political cycle is therefore a puzzle. IN THE RUN-UP TOALL PRESIDENTIAL ELECTIONS, the popular press is awash with reports about whether Republicans or Democrats are better for the stock market. Unfortunately, the popular interest has not been matched by academic research. This paper ¢lls that gap by conducting a careful empirical analysis of the relation between presidential elections and the stock market. Using data since 1927, we ¢nd that the average excess return of the valueweighted CRSP index over the three-month Treasury bill rate has been about 2 percent under Republican and 11 percent under Democratic presidentsFa striking diierence of 9 percent per year! This diierence is economically and statistically signi¢cant. A decomposition of excess returns reveals that the diierence is due to real market returns being higher under Democrats by more than 5 percent, as well as to real interest rates being almost 4 percent lower under Democrats. The results are even more impressive for the equal-weighted portfolio, where the diierence in excess returns between Republicans and Democrats reaches 16 percent. Moreover, we observe an absolute monotonicity in the diierence between size-decile portfolios under the two political regimes: From 7 percent for the largest ¢rms to about 22 percent for the smallest ¢rms.
354 citations
TL;DR: In this article, the effect of presidential elections on aggregate stock price movements and the implication of these movements on market efficiency is examined. But the effect on stock market efficiency was not examined.
Abstract: Wall Street abounds with folklore concerning aggregate stock price movements before and after Presidential elections. Some suggest that movements in the Dow Jones Industrial Average (DJIA) portend the outcome of elections. Others attribute movements in the market, prior to and after the election, to the anticipated outcome of the election. In this paper we examine some of the folklore with respect to the effect of Presidential elections on aggregate stock price movements and the implication of these movements on market efficiency.
127 citations
TL;DR: The US economy has performed better when the president of the United States is a Democrat rather than a Republican, almost regardless of how one measures performance as discussed by the authors, and it appears that the Democratic edge stems mainly from more benign oil shocks, superior total factor productivity (TFP) performance, and perhaps more optimistic consumer expectations about the near-term future.
Abstract: The US economy has performed better when the president of the United States is a Democrat rather than a Republican, almost regardless of how one measures performance. For many measures, including real GDP growth (our focus), the performance gap is large and significant. This paper asks why. The answer is not found in technical time series matters nor in systematically more expansionary monetary or fiscal policy under Democrats. Rather, it appears that the Democratic edge stems mainly from more benign oil shocks, superior total factor productivity (TFP) performance, a more favorable international environment, and perhaps more optimistic consumer expectations about the near-term future. (JEL D72, E23, E32, E65, N12, N42) An extensive and well-known literature of scholarly research documents and explores the fact that macroeconomic performance is a strong predictor of US presidential election outcomes. Scores of papers find that better performance boosts the vote of the incumbent’s party. 1 In stark contrast, economists have paid scant attention to predictive power running in the opposite direction: from election outcomes to subsequent macroeconomic performance. The answer, while hardly a secret, is not nearly as widely known as it should be. 2 The US economy performs much better when a Democrat is president than when a Republican is.
93 citations
Posted Content•
TL;DR: The U.S. economy has grown faster and scored higher on many other macroeconomic metrics when the President of the United States is a Democrat rather than a Republican as mentioned in this paper, and the performance gap is both large and statistically significant, despite the fact that postwar history includes only 16 complete presidential terms.
Abstract: The U.S. economy has grown faster—and scored higher on many other macroeconomic metrics-- hen the President of the United States is a Democrat rather than a Republican. For many measures, including real GDP growth (on which we concentrate), the performance gap is both large and statistically significant, despite the fact that postwar history includes only 16 complete presidential terms. This paper asks why. The answer is not found in technical time series matters (such as differential trends or mean reversion), nor in systematically more expansionary monetary or fiscal policy under Democrats. Rather, it appears that the Democratic edge stems mainly from more benign oil shocks, superior TFP performance, a more favorable international environment, and perhaps more optimistic consumer expectations about the near-term future. Many other potential explanations are examined but fail to explain the partisan growth gap.
82 citations