Working Paper: CEPR ID: DP14243
Authors: Linda Marlene Schilling
Abstract: The paper provides a novel theory of how banks not only exploit but also cause being perceived as 'too big to fail'.Bank creditors are also voters. Economic voting prompts politicians to grant bailouts given a bank failure.The bank's capital structure acts as a tool to impact the electoral vote and thus the bail-out by changing the relative group size of voters who favor as opposed to voters who object the bailout. The creditors' anticipation of high bailouts, in return, allows the bank to reduce funding costs today, by this maximizing revenues.
Keywords: Corporate Finance; Bailouts; Political Economy; Economic Voting; Capital Structure; Influencing
JEL Codes: G3; P16; D72
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Banks' capital structure (G21) | Political decisions regarding bailouts (G28) |
| Change in creditor voter size (G34) | Likelihood of receiving a bailout (G28) |
| Political outcomes (bailouts) (H81) | Banks' funding costs (G21) |