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The power of k: politically-targeted activities, connections and the financial system

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Abstract

Has the political influence of the financial industry had any bearing on financial regulation and, ultimately, the recent financial crisis? This paper discusses the findings of recent research that uses a detailed database of the lobbying activities, campaign contributions, political connections and mortgage lending activities of the financial industry from 1999 to 2006 in the United States. The evidence suggests that spending on lobbying by the financial industry and network connections between lobbyists and the legislators were positively linked to the probability of a legislator changing positions in favor of deregulation. Also, hiring connected lobbyists who had worked for legislators in the past enhanced the effectiveness of lobbying activities. In addition, lobbying was associated with more risk-taking during 2000-07 and with worse outcomes in 2008. Finally, lobbying lenders had a higher bailout probability. These findings suggest that actions of politically influential financial institutions may play a role in shaping financial regulation and in the accumulation of risks in the system.

Suggested Citation

  • Igan, Deniz & Mishra, Prachi, 2012. "The power of k: politically-targeted activities, connections and the financial system," Journal of Financial Transformation, Capco Institute, vol. 35, pages 147-158.
    • Handle: RePEc:ris:jofitr:1535
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    More about this item

    Keywords

    financial system; political influence; financial regulation; financial crisis; lobbying; campaigns; political connections;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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