The Price of Lobbying in Banking

CERETH Economics Working Paper Series 19/308

55 Pages Posted: 27 Jan 2019 Last revised: 26 Nov 2020

See all articles by Hans Gersbach

Hans Gersbach

ETH Zurich - CER-ETH -Center of Economic Research; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Stylianos Papageorgiou

ETH Zürich; Centre for Economic Policy Research (CEPR)

Date Written: November 24, 2020

Abstract

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

Gersbach, Hans and Papageorgiou, Stylianos, The Price of Lobbying in Banking (November 24, 2020). CERETH Economics Working Paper Series 19/308, Available at SSRN: https://ssrn.com/abstract=3316775 or http://dx.doi.org/10.2139/ssrn.3316775

Hans Gersbach (Contact Author)

ETH Zurich - CER-ETH -Center of Economic Research ( email )

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IZA Institute of Labor Economics

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CESifo (Center for Economic Studies and Ifo Institute)

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Centre for Economic Policy Research (CEPR)

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Stylianos Papageorgiou

ETH Zürich ( email )

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Zürich, 8092
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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