The Price of Lobbying in Banking
CERETH Economics Working Paper Series 19/308
55 Pages Posted: 27 Jan 2019 Last revised: 26 Nov 2020
Date Written: November 24, 2020
We study how bankers can elicit lower capital requirements via lobbying: Bankers pledge to politicians a lobbying rate as a fraction of bank revenues, thus relating politicians' welfare to the size of banks. This induces politicians to lower capital requirements, which causes high leverage and
excessive investments in risky technologies. We establish a non-monotonic relationship between the lobbying rate and the likelihood that a crisis occurs. We also predict that the lobbying rate increases monotonically as political participation rises and/or government guarantees expand. Finally, we suggest that a lobbying tax or shareholder-welfare maximization can alleviate the inefficiencies created by lobbying.
Keywords: lobbying, capital requirements, government guarantees, capital allocation, general equilibrium.
JEL Classification: D53, D72, G21, G28
Suggested Citation: Suggested Citation