Hostname: page-component-7bb8b95d7b-l4ctd Total loading time: 0 Render date: 2024-09-06T13:06:47.889Z Has data issue: false hasContentIssue false
  • English
  • Français

Bank Influence at a Discount

Published online by Cambridge University Press:  03 May 2023

Hans Gersbach  and
Stylianos Papageorgiou
Hans Gersbach
Affiliation:
ETH Zurich, KOF, and CER-ETH – Center of Economic Research and CEPR [email protected]
Stylianos Papageorgiou*
Affiliation:
University of Cyprus Department of Accounting and Finance
*
[email protected] (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

In a general equilibrium framework, we show that banks may “buy” political influence at a discount: They offer disproportionately small campaign contributions compared to the influence they exert, thus generating abnormal returns. We distinguish between the direct effect of contributions which, as a cost, reduce bank returns, and the indirect effect of contributions which boost returns via inducing bank-favoring policies. Therefore, abnormal returns may or may not increase with the amount of contributions, depending on which effect dominates: Stricter capital requirements decrease contributions and abnormal returns. When politicians attach more weight to households’ welfare, contributions increase and abnormal returns decrease.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , First View , pp. 1 - 31
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (https://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We are grateful to an anonymous referee and Mara Faccio (the editor), whose comments and suggestions helped improve the article. We thank Volker Britz, Hugo van Buggenum, Alexander Michaelides, Andrea Musso, Jean-Charles Rochet, Haresh Sapra, Javier Suarez, seminar participants at ETH Zurich and the University of Cyprus, and participants at the 2019 European Meeting of the Econometric Society for valuable comments.

References

Admati, A., and Hellwig, M.. The Bankers’ New Clothes: What’s Wrong with Banking and What to Do About It. Princeton, NJ: Princeton University Press (2014).CrossRefGoogle Scholar
Agarwal, S.; Amromin, G.; Ben-David, I.; and Dinc, S.. “The Politics of Foreclosures.” Journal of Finance, 73 (2018), 2677–2717.CrossRefGoogle Scholar
Allen, F.; Carletti, E.; Goldstein, I.; and Leonello, A.. “Government Guarantees and Financial Stability.” Journal of Economic Theory, 177 (2018), 518–557.CrossRefGoogle Scholar
Allen, F.; Carletti, E.; and Marquez, R.. “Deposits and Bank Capital Structure.” Journal of Financial Economics, 118 (2015), 601–619.CrossRefGoogle Scholar
Avi-Yonah, R. S. “Taxation as Regulation: Carbon Tax, Health Care Tax, Bank Tax and Other Regulatory Taxes.” Accounting, Economics, and Law, 1 (2011), 518–557.Google Scholar
Bertrand, M.; Bombardini, M.; Fisman, R.; and Trebbi, F.. “Tax-Exempt Lobbying: Corporate Philanthropy as a Tool for Political Influence.” American Economic Review, 110 (2020), 2065–2102.CrossRefGoogle Scholar
Blau, B. M.; Brough, T. J.; and Thomas, D. W.. “Corporate Lobbying, Political Connections, and the Bailout of Banks.” Journal of Banking and Finance, 37 (2013), 3007–3017.CrossRefGoogle Scholar
Bombardini, M. “Firm Heterogeneity and Lobby Participation.” Journal of International Economics, 75 (2008), 329–348.CrossRefGoogle Scholar
Bombardini, M., and Trebbi, F.. “Votes or Money? Theory and Evidence from the US Congress.” Journal of Public Economics, 95 (2011), 587–611.CrossRefGoogle Scholar
Braithwaite, T., and Jenkins, P.. “JP Morgan Chief Says Bank Rules ‘Anti-US’.” Financial Times, Sept. 12. Retrieved from https://www.ft.com (2011).Google Scholar
Brown, C. O., and Dinc, I. S.. “The Politics of Bank Failures: Evidence from Emerging Markets.” Quarterly Journal of Economics, 120 (2005), 1413–1444.CrossRefGoogle Scholar
Calomiris, C. W., and Chen, S.. “The Spread of Deposit Insurance and the Global Rise in Bank Asset Risk since the 1970s.” Journal of Financial Intermediation, 49 (2022), 100881.CrossRefGoogle Scholar
Calomiris, C. W., and Haber, S. H.. Fragile by Design: The Political Origins of Banking Crises and Scarce Credit. Princeton, NJ: Princeton University Press (2014).Google Scholar
Carletti, E.; Marquez, R.; and Petriconi, S.. “The Redistributive Effects of Bank Capital Regulation.” Journal of Financial Economics, 136 (2020), 743–759.CrossRefGoogle Scholar
Chalmers, A. W. “When Banks Lobby: The Effects of Organizational Characteristics and Banking Regulations on International Bank Lobbying.” Business and Politics, 19 (2017), 107–134.CrossRefGoogle Scholar
Chu, Y., and Zhang, T.. “Political Influence and Banks: Evidence from Mortgage Lending.” Journal of Financial Intermediation, 52 (2022), 100982.CrossRefGoogle Scholar
Claessens, S.; Feijen, E.; and Laeven, L.. “Political Connections and Preferential Access to Finance: The Role of Campaign Contributions.” Journal of Financial Economics, 88 (2008), 554–580.CrossRefGoogle Scholar
Claessens, S.; Keen, M.; and Pazarbasioglu, C., eds. Financial Sector Taxation. The IMF’s Report to the G-20 and Background Material. Washington, DC: International Monetary Fund (2010).Google Scholar
Cooper, M. J.; Gulen, H.; and Ovtchinnikov, A. V.. “Corporate Political Contributions and Stock Returns.” Journal of Finance, 65 (2010), 687–724.CrossRefGoogle Scholar
Crawford, V. P., and Sobel, J.. “Strategic Information Transmission.” Econometrica, 50 (1982), 1431–1451.CrossRefGoogle Scholar
Dal Bó, E. “Bribing Voters.” American Journal of Political Science, 51 (2007), 789–803.CrossRefGoogle Scholar
Denzau, A., and Munger, M.. “Legislators and Interest Groups: How Unorganized Interests Get Represented.” American Political Science Review, 80 (1986), 89–106.CrossRefGoogle Scholar
Diamond, D. W., and Dybvig, P. H.. “Bank Runs, Deposit Insurance, and Liquidity.” Journal of Political Economy, 91 (1983), 401–419.CrossRefGoogle Scholar
Doerr, S.; Drechsel, T.; and Lee, D.. “Income Inequality, Financial Intermediation, and Small Firms.” BIS Working Papers No. 944 (2021).Google Scholar
Faccio, M. “Politically Connected Firms.” American Economic Review, 96 (2006), 369–386.CrossRefGoogle Scholar
Foarta, D. “The Limits to Partial Banking Unions: A Political Economy Approach.” American Economic Review, 108 (2018), 1187–1213.CrossRefGoogle Scholar
Friedman, H. L., and Heinle, M. S.. “Influence Activities, Coalitions, and Uniform Policies: Implications for the Regulation of Financial Institutions.” Management Science, 66 (2020), 4336–4358.CrossRefGoogle Scholar
Gersbach, H.; Haller, H.; and Müller, J.. “The Macroeconomics of Modigliani-Miller.” Journal of Economic Theory, 157 (2015), 1081–1113.CrossRefGoogle Scholar
Gersbach, H., and Rochet, J.-C.. “Capital Regulation and Credit Fluctuations.” Journal of Monetary Economics, 90 (2017), 113–124.CrossRefGoogle Scholar
Goldman, E.; Rocholl, J.; and So, J.. “Do Politically Connected Boards Affect Firm Value?” Review of Financial Studies, 22 (2009), 2331–2360.CrossRefGoogle Scholar
Grossman, G. M., and Helpman, E.. “Protection for Sale.” American Economic Review, 84 (1994), 833–850.Google Scholar
Helpman, E., and Persson, T.. “Lobbying and Legislative Bargaining.” Advances in Economic Analysis and Policy, 1 (2001), 1–33.CrossRefGoogle Scholar
Igan, D., and Lambert, T.. “Bank Lobbying: Regulatory Capture and Beyond.” In The Political Economy of Financial Regulation, Avgouleas, E., and Donald, D., eds. Cambridge: Cambridge University Press (2019).Google Scholar
Igan, D., and Mishra, P.. “Wall Street, Capitol Hill, and K Street: Political Influence and Financial Regulation.” Journal of Law and Economics, 57 (2014), 1063–1084.CrossRefGoogle Scholar
Igan, D.; Mishra, P.; and Tressel, T.. “A Fistful of Dollars: Lobbying and the Financial Crisis.” NBER Working Paper No. 17076 (2011).CrossRefGoogle Scholar
Keister, T. “Bailouts and Financial Fragility.” Review of Economic Studies, 83 (2016), 704–736.CrossRefGoogle Scholar
Khwaja, A. I., and Mian, A.. “Do Lenders Favor Politically Connected Firms? Rent Provision in an Emerging Market.” Quarterly Journal of Economics, 120 (2005), 1371–1411.CrossRefGoogle Scholar
Kostovetsky, L. “Political Capital and Moral Hazard.” Journal of Financial Economics, 116 (2015), 144–159.CrossRefGoogle Scholar
Kroszner, R. S., and Stratmann, T.. “Interest-Group Competition and the Organization of Congress: Theory and Evidence from Financial Services’ Political Action Committees.” American Economic Review, 88 (1998), 1163–1187.Google Scholar
Lambert, T. “Lobbying on Regulatory Enforcement Actions: Evidence from U.S. Commercial and Savings Banks.” Management Science, 65 (2019), 2545–2572.CrossRefGoogle Scholar
Leaver, C., and Makris, M.. “Passive Industry Interests in a Large Polity.” Journal of Public Economic Theory, 8 (2006), 571–602.CrossRefGoogle Scholar
Mitchell, M.; Currie, R.; and Ghei, N.. A Summary of the History and Effects of Anti-Aid Provisions in State Constitutions. Fairfax, VA: Mercatus Center Policy Brief, George Mason University (2019).Google Scholar
Mitra, D. “Endogenous Lobby Formation and Endogenous Protection: A Long-Run Model of Trade Policy Determination.” American Economic Review, 89 (1999), 1116–1134.CrossRefGoogle Scholar
Pennacchi, G., and Santos, J. A. C.. “Why Do Banks Target ROE?” Journal of Financial Stability, 51 (2021), 100856.CrossRefGoogle Scholar
Rasmusen, E., and Ramseyer, J. M.. “Cheap Bribes and the Corruption Ban: A Coordination Game among Rational Legislators.” Public Choice, 78 (1994), 305–327.CrossRefGoogle Scholar
Rola-Janicka, M. “The Political Economy of Prudential Regulation.” Working Paper, available at https://ssrn.com/abstract=3685733 (2020).CrossRefGoogle Scholar
Teso, E. “What Drives U.S. Corporate Elites’ Campaign Contribution Behavior?” Working Paper, available at https://ssrn.com/abstract=4026872 (2022).CrossRefGoogle Scholar
Thakor, A. V. “Bank Capital and Financial Stability: An Economic Trade-Off or a Faustian Bargain?” Annual Review of Financial Economics, 6 (2014), 185–223.CrossRefGoogle Scholar
Thakor, A. V. “Politics, Credit Allocation and Bank Capital Requirements.” Journal of Financial Intermediation, 45 (2021), 100820.CrossRefGoogle Scholar
Tullock, G. “The Purchase of Politicians.” Western Economic Journal, 10 (1972), 354–355.Google Scholar
Young, K. L. “Transnational Regulatory Capture? An Empirical Examination of the Transnational Lobbying of the Basel Committee on Banking Supervision.” Review of International Political Economy, 19 (2012), 663–688.CrossRefGoogle Scholar