The impact of political settings on banks’ jumbo mortgage lending: Evidence from US state‐chartered banks under dual banking system

Abstract We study the impact of state political settings on banks’ jumbo mortgage lending. The Constitution of the United States divides the government into three separate branches: executive, legislative, and judicial. A state government is unified if a party controls both the executive branch and the legislative branch; otherwise, it is divided. A state government can be classified into three political settings: Unified Democratic, Unified Republican, and Divided. It is commonly argued that the Democratic Party relies heavily on government regulations to influence the economy, whereas the Republican Party favors minimum government intervention. We find empirical evidence suggesting that banks are more willing to approve illiquid jumbo mortgages under a Unified Republican government. Further examination shows that banks with varying characteristics exhibit different levels of sensitivity to state political settings.