Working Paper

Policy Externalities and Banking Integration

Abstract: Can policies directed at the banking sector in one jurisdiction spill over and affect real economic activity elsewhere? To investigate this question, I exploit changes in tax rates on bank profits across U.S. states. Banks respond by reallocating small-business lending to otherwise unaffected states. Moreover, counties in non-tax-changing states that have more exposure to treated banks experience greater changes in lending, which in turn impacts local employment. The findings demonstrate that policies aimed at the banking sector in one jurisdiction can impose externalities on other regions. Critically, financial linkages between regions serve as the transmission channel for these policy externalities.

Keywords: Banks; Credit Supply; Internal Capital Markets; Policy Arbitrage; Small Business Lending; Taxation;

JEL Classification: G20; G21; H23; H25;

https://doi.org/10.17016/FEDS.2016.008r1

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2018-02-15

Number: 2016-8

Pages: 50 pages