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Bridging the Gap? Government Subsidized Lending and Access to Capital

The consequences of providing public funds to financial institutions remain controversial. We examine the Community Development Financial Institution (CDFI) Fund's impact on credit union activity, using hitherto little studied U.S. Treasury data. The CDFI Fund grants increase lending at credit unions by 3%. For every dollar awarded, 45 additional cents are loaned out to borrowers in the first year, and up to an additional $1.60 is loaned out within three years. Delinquent loan rates also increase slightly. Our panel results are supported by a broadband regression discontinuity analysis. Politics does not seem to play a role in allocating funding.

Keywords: CDFI, credit supply, loan demand, loan growth, loan loss, political connection.
JEL Code: G28.

Suggested citation: Lerner, Josh and Kristle Romero Cortes, 2012. "Bridging the Gap? Government Subsidized Lending and Access to Capital," Federal Reserve Bank of Cleveland, Working Paper no. 12-29.

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