Research Seminar Program - Hanh Le (University of Illinois at Chicago)

Title: Stakeholders’ Aversion to Inequality and Bank Lending to Under-Served Borrowers∗

Abstract: Using mortgage loan application data collected under the Home Mortgage Disclosure Act, we find that banks whose depositors, CEOs, independent directors and founders are more averse to inequality are more likely to lend to underserved borrowers, those who are nonwhite, Hispanic, female, as well as those from high minority and low income census tracts. These results are not driven by endogeneity problems such as banks’ geographical footprint and expertise, differential  access to borrower soft information or executive self-section. Depositors seem to influence bank lending practices via deposit flows. In particular, in counties where white residents exhibit low racial bias and where banks do not have significant market power, banks with increased propensity to lend to nonwhite borrowers
experience higher deposit inflows. We find no evidence that increased propensity to lend to underserved borrowers leads to worse loan performance. This suggests that discrimination may be present and that the degree of discrimination can be influenced by bank stakeholders’ inequality aversion.