Congress and Banks: The Impact of Federal Elections on Bank Stability

Existing literature and industry best practices have extensively clarified the necessity of regulation in financial markets including deposit insurance and broad prudential regulation. In the United States, this regulatory framework has largely been developed by Congress, including through the creation and authorization of the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Federal Reserve Bank. Despite the creation of these institutions, banking crises have continued to pockmark American financial history and development. While the establishment of regulatory bodies and congressional regulation has been a net benefit for the United States economy and its stakeholders, concerns still exist over the use of Congress to determine regulatory policy. What impact do federal elections have on the creation and outcomes of banking regulation? This work adds to the literature by examining the the timing, partisanship, and impact of federal banking legislation. In order to evaluate this claim, we examine the theoretical mechanism and empirical relationship between elections, federal policymaking and measures of credit and systemic risk amongst commercial banks. The results of the empirical work indicate significant interactions between partisanship, legislation, and financial conditions, but leave additional work to be done to evaluate the impact of elections.