Lobbying and the Financial Crisis

A new NBER paper finds that, before the financial crisis, the more a financial institution engaged in lobbying, the riskier its loan portfolio and the worse its performance during and after the crisis. The idea that bank regulation creates moral hazard is so well-known, almost trite, that hardly anyone talks about it any more. But let’s not forget moral hazard, along with the Fed’s easy money policy, as a prime determinant of the crisis. Here’s the paper:

A Fistful of Dollars: Lobbying and the Financial Crisis
Deniz Igan, Prachi Mishra, Thierry Tressel
NBER Working Paper No. 17076, May 2011

Has lobbying by financial institutions contributed to the financial crisis? This paper uses detailed information on financial institutions’ lobbying and mortgage lending activities to answer this question. We find that lobbying was associated with more risk-taking during 2000-07 and with worse outcomes in 2008. In particular, lenders lobbying more intensively on issues related to mortgage lending and securitization (i) originated mortgages with higher loan-to-income ratios, (ii) securitized a faster growing proportion of their loans, and (iii) had faster growing originations of mortgages. Moreover, delinquency rates in 2008 were higher in areas where lobbying lenders’ mortgage lending grew faster. These lenders also experienced negative abnormal stock returns during the rescue of Bear Stearns and the collapse of Lehman Brothers, but positive abnormal returns when the bailout was announced. Finally, we find a higher bailout probability for lobbying lenders. These findings suggest that lending by politically active lenders played a role in accumulation of risks and thus contributed to the financial crisis.

Peter G. Klein is a Research Fellow, Associate Editor of The Independent Review, and Member of the Board of Advisors of the Center on Culture and Civil Society at the Independent Institute.
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