Bank Influence at a Discount

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.