Public Choice

, Volume 172, Issue 3–4, pp 333–358 | Cite as

Lobbying, political connections and emergency lending by the Federal Reserve

Article

Abstract

This paper tests whether the political connections of banks were important in explaining participation in the Federal Reserve’s emergency lending programs during the recent financial crisis. Our multivariate tests show that banks that were politically connected—either through lobbying efforts or employment of politically connected individuals—were substantially more likely to participate in the Federal Reserve’s emergency loan programs. In economic terms, participation in these programs was 28–36% more likely for banks that were politically connected than for banks that were not politically connected. In our final set of tests, we attempt to identify a proper explanation for this peculiar relationship. While a broad literature speaks of the moral hazard associated with receiving bailouts, we test whether another type of moral hazard exists in the period preceding the bailout. In particular, we argue that, to the extent that political connections act as synthetic insurance, banks may have engaged in more risky behavior that lead them to the Fed’s emergency lending facilities. Tests seem to confirm this explanation.

Keywords

Emergency loans Federal Reserve policy Financial crisis Lobbying Political connections 

JEL Classification

D72 G21 G28 

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Copyright information

© Springer Science+Business Media New York 2017

Authors and Affiliations

  1. 1.Department of Economics and Finance, Jon M. Huntsman School of BusinessUtah State UniversityLoganUSA

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