Bank Influence at a Discount

Abstract

In a general equilibrium framework, we study the cost incurred by banks to ``buy'' influence on capital regulation via campaign contributions. Our central result is that banks buy influence at a discount: They incur a cost that does not fully reflect the effect of lowering capital requirements. This allows banks to achieve abnormal returns. The larger the discount, the higher the abnormal returns, and the stronger the Tullock paradox (1972)---i.e., low contributions for high influence---appears in the context of banking. We proceed to identify how political and banking-specific factors affect the prominence of the paradox.

Keywords: campaign contributions, abnormal returns, capital requirements, general equilibrium

JEL Classification: D53, D72, G21, G28