Lobbying, political connections and emergency lending by the Federal Reserve

Lobbying, political connections and emergency lending by the Federal Reserve This paper tests whether the political connections of banks were important in explaining participation in the Federal Reserve’s emergency lending programs during the recent financial crisis. Our multivariate tests show that banks that were politically connected—either through lobbying efforts or employment of politically connected individuals—were substantially more likely to participate in the Federal Reserve’s emergency loan programs. In economic terms, participation in these programs was 28–36% more likely for banks that were politically connected than for banks that were not politically connected. In our final set of tests, we attempt to identify a proper explanation for this peculiar relationship. While a broad literature speaks of the moral hazard associated with receiving bailouts, we test whether another type of moral hazard exists in the period preceding the bailout. In particular, we argue that, to the extent that political connections act as synthetic insurance, banks may have engaged in more risky behavior that lead them to the Fed’s emergency lending facilities. Tests seem to confirm this explanation. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Public Choice Springer Journals

Lobbying, political connections and emergency lending by the Federal Reserve

Public Choice , Volume 172 (4) – May 29, 2017
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Publisher
Springer US
Copyright
Copyright © 2017 by Springer Science+Business Media New York
Subject
Economics; Public Finance; Political Science
ISSN
0048-5829
eISSN
1573-7101
D.O.I.
10.1007/s11127-017-0446-8
Publisher site
See Article on Publisher Site

Abstract

This paper tests whether the political connections of banks were important in explaining participation in the Federal Reserve’s emergency lending programs during the recent financial crisis. Our multivariate tests show that banks that were politically connected—either through lobbying efforts or employment of politically connected individuals—were substantially more likely to participate in the Federal Reserve’s emergency loan programs. In economic terms, participation in these programs was 28–36% more likely for banks that were politically connected than for banks that were not politically connected. In our final set of tests, we attempt to identify a proper explanation for this peculiar relationship. While a broad literature speaks of the moral hazard associated with receiving bailouts, we test whether another type of moral hazard exists in the period preceding the bailout. In particular, we argue that, to the extent that political connections act as synthetic insurance, banks may have engaged in more risky behavior that lead them to the Fed’s emergency lending facilities. Tests seem to confirm this explanation.

Journal

Public ChoiceSpringer Journals

Published: May 29, 2017

References

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