What is it about?
The goal of this article is to assess the impact of banks’ lobbying activities on the supervisory decisions of regulators. Exploiting bank-level information on the universe of U.S. commercial and savings banks during the financial crisis and its aftermath, I find that lobbying banks are less likely to be the target of enforcement actions from regulators. In turn, lobbying banks—benefiting from a preferential treatment—are riskier and underperforming than non-lobbying banks. Taken together, these results are consistent with the theory of regulatory capture.
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Why is it important?
This is the first study investigating whether and how banks’ lobbying activities also affect supervision (that is, the ability of regulators to enforce the rules in place), besides regulation (that is, their ability to design proper rules). From a sample comprising virtually all commercial and savings banks in the U.S., this article focuses in particular on enforcement actions, which are key micro-prudential supervisory tools to ensure the safety and soundness of the banking system. Importantly, this article further looks at the economic channel and reveals that the lobbying process, acting as a shield against costly enforcement actions, allows banks to “safely” pursue riskier strategies having potentially adverse consequences for financial stability.
Perspectives
The ability of regulators to impose regulatory enforcement actions is crucial to ensure the safety and soundness of the banking system and, more broadly, to support the public interest. By providing evidence that banks can interfere in the supervisory process using their political influence to avoid enforcement, I show that supervision can be directed away from the interest of the general public. My findings have thus implications for the design of banking regulation and supervision. Indeed, while my findings should not be interpreted as evidence for banning lobbying, they decisively point in the direction of a need for tighter rules governing lobbying activities. This implies that policymakers should advocate for greater transparency but also address the pervasive dominance of the banking industry and their lobbyists as a special interest group.
Thomas Lambert
Erasmus Universiteit Rotterdam
Read the Original
This page is a summary of: Lobbying on Regulatory Enforcement Actions: Evidence from U.S. Commercial and Savings Banks, Management Science, January 2018, INFORMS,
DOI: 10.1287/mnsc.2017.2895.
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