Lobbying and high-risk lending: what’s the link?

A new study, “A Fistful of Dollars:  Lobbying and the Financial Crisis,” analyzes the correlation between financial institutions’ lobbying and lending activities.  An article discusses the report here and the study is available here (78 page PDF).  The authors conclude:

We show that lenders that lobby more intensively on these specific issues have (i) more lax lending standards measured by loan-to-income ratio, (ii) greater tendency to securitize, and (iii) faster growing mortgage loan portfolios. Ex post, delinquency rates are higher in areas in which lobbying lenders’ mortgage lending grew faster, and, during key events of the crisis, these lenders experienced negative abnormal stock returns. These findings seem to be consistent with a moral hazard interpretation whereby financial intermediaries lobby to obtain private benefits, making loans under less stringent terms. Moral hazard could emerge because they expect to be bailed out when losses amount during a financial crisis or because they privilege short-term gains over long-term profits. With the caveat that overoptimism might also be consistent with some of the findings, our analysis suggests that the political influence of the financial industry can be a source of systemic risk. Therefore, it provides some support to the view that the prevention of future crises might require weakening political influence of the financial industry.

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