An interesting study of the relationship between financial lobbying and risk-taking. The authors conclude:
“We find that, between 2000 and 2006, the lenders that lobbied most intensively to prevent a tightening of laws and regulations related to mortgage lending also:
- originated mortgages with higher loan-to-income ratios,
- increased their recourse to securitisation more rapidly than other lenders, and
- had faster-growing mortgage-loan portfolios.
These findings suggest that lobbying by financial institutions was a factor contributing to the deterioration in credit quality and contributed to the build-up of risks prior to the crisis...
Our study offers two pieces of evidence showing that lobbying lenders experienced worse performance once the financial crisis started.
- First, delinquency rates in 2008 were significantly higher in areas where mortgage lending by lobbying lenders had expanded relatively faster than mortgage lending by other lenders.
- Second, these lobbying lenders experienced negative abnormal returns around the key events of the crisis (such as the collapse of Lehman Brothers).
All in all, this evidence suggests that these lenders had larger exposures to poorly performing mortgage loan pools.”
