Political Partisanship and State-Level Bank Efficiency

Abstract

We examine the relationship between political partisanship and commercial bank efficiency in the United States from 1972 to 2020, assessing the persistent influence of political affiliations at the state and District of Columbia levels. Bank efficiency scores are estimated using a double-bootstrap approach, and the analysis is conducted within a Spatial Dynamic panel Tobit framework that controls for a broad set of banking and macroeconomic factors. The results reveal a significant effect of US state and national elections on interdependent bank efficiency scores, providing robust support for the partisan theory in the context of US banking over five decades. We find compelling evidence that Democratic victories at both the state and national levels are associated with higher state-level bank efficiency, even after accounting for bank-specific characteristics. Additionally, changing the political party in power every four years could enhance the efficiency of the US banking system. These findings suggest that political change, rather than being purely disruptive, can act as a catalyst for efficiency improvements in the US banking system. The results remain consistent across multiple robustness tests.