Working Paper: NBER ID: w9792
Authors: Christopher M. Meissner
Abstract: Early nineteenth century New England banking exhibited high levels of lending to directors and their associates (i.e., connected lending). Today many think this arrangement can lead to inefficiency and financial fragility. This paper explores the decision making processes inside these banks and argues that connected lending was viable when many people were involved in loan decisions. The committees used to vote on the approval of loans are the focus. Banks that required more votes for a given committee size prevented the approval of loans with private gains and social costs. The historical data are consistent with the idea that higher levels of consensus in the loan committees raised the return on assets.
Keywords: No keywords provided
JEL Codes: D71; D72; G3; N2; N8
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased consensus (D70) | better financial performance (G29) |
| stricter voting requirements (K16) | less likely to approve loans with private gains (G21) |
| committee structure (L22) | outcomes of connected lending (G21) |