Working Paper: NBER ID: w17076
Authors: Deniz Igan; Prachi Mishra; Thierry Tressel
Abstract: Has lobbying by financial institutions contributed to the financial crisis? This paper uses detailed information on financial institutions' lobbying and mortgage lending activities to answer this question. We find that lobbying was associated with more risk-taking during 2000-07 and with worse outcomes in 2008. In particular, lenders lobbying more intensively on issues related to mortgage lending and securitization (i) originated mortgages with higher loan-to-income ratios, (ii) securitized a faster growing proportion of their loans, and (iii) had faster growing originations of mortgages. Moreover, delinquency rates in 2008 were higher in areas where lobbying lenders' mortgage lending grew faster. These lenders also experienced negative abnormal stock returns during the rescue of Bear Stearns and the collapse of Lehman Brothers, but positive abnormal returns when the bailout was announced. Finally, we find a higher bailout probability for lobbying lenders. These findings suggest that lending by politically active lenders played a role in accumulation of risks and thus contributed to the financial crisis.
Keywords: Lobbying; Financial Crisis; Mortgage Lending
JEL Codes: G21; P16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Lobbying lenders (G21) | Faster growing proportion of securitized loans (G21) |
| Growth in lobbying lenders' mortgage lending (G21) | Higher delinquency rates in 2008 (G33) |
| Lobbying lenders (G21) | Negative abnormal stock returns during Bear Stearns and Lehman Brothers failures (G01) |
| Announcement of bailout (G28) | Positive stock returns for lobbying lenders (G21) |
| Lobbying activities (D72) | Higher probability of receiving bailout funds (H81) |
| Lobbying lenders (G21) | Higher loan-to-income ratios (LIR) (G21) |