N°26-73: Political Polarization and Bank Liquidity

We examine how political polarization affects banks' liquidity transformation using quarterly data on U.S. commercial banks from 2001 to 2024. We find that a onestandard-deviation increase in partisan conflict lowers liquidity creation by 0.4% of its sample mean and raises liquidity hoarding by 2-3%, with total hoarding rising 8.5% from average to peak polarization. Measured against total assets, hoarding rises three to four times as much as creation falls, indicating that banks respond mainly through precautionary self-insurance. Lower loan-to-deposit ratios and higher liquid-asset and stable-funding ratios corroborate this interpretation. We identify two mechanisms. First, an instrumental-variable analysis shows that policy uncertainty is an important channel through which polarization affects banks' liquidity decisions. Second, we document a delayed-stabilization channel, whereby expectations of slower or less credible public intervention intensify precautionary hoarding. The effects are strongest among smaller banks and banks more reliant on uninsured deposits, and they intensify during presidential elections and recessions. Our findings identify political polarization as an economically meaningful determinant of bank liquidity management, with implications for financial stability and macroprudential supervision.