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Has lobbying by financial institutions contributed to the financial crisis? This paper uses detailed information on financial institutions’ lobbying and their mortgage lending activities to answer this question. We find that, during 2000-07, lenders lobbying more intensively on specific issues related to mortgage lending (such as consumer protection laws) and securitization (i) originated mortgages with higher loan-to-income ratios, (ii) securitized a faster growing proportion of their loans, and (iii) had faster growing loan portfolios. Ex-post, delinquency rates are higher in areas where lobbying lenders’ mortgage lending grew faster. These lenders also experienced negative abnormal stock returns during key events of the crisis. The findings are robust to (i) falsification tests using information on lobbying activities on financial sector issues unrelated to mortgage lending, (ii) instrumental variables strategies, and (iii) a difference-in-difference approach based on state-level lending laws. These results suggest that lobbying may be linked to lenders expecting special treatments from policymakers, allowing them to engage in riskier lending behavior.
Deniz Igan, Prachi Mishra, and Thierry Tressel, Research Department, IMF‡
October 14, 2009