From the TUC

IMF report: banks that take biggest risks lobby for least regulation

30 Dec 2009, by in Economics

Although it probably shouldn’t surprise anyone, it’s nonetheless interesting to see a group of International Monetary Fund (IMF) staff have reported (although this is not a statement of IMF policy, necessarily) that the US banks most active in lobbying against regulation of the financial sector are the ones who took the biggest risks over the mortgage and other deals which caused the crisis. Their paper explores the evidence behind the…

“anecdotal evidence [which] suggests that the political influence of the financial industry contributed to the 2007 mortgage crisis, which, in the fall of 2008, generalized in the worst bout of financial instability since the Great Depression.”

And it finds them guilty. Politicians should take note that anti-regulators really should not be trusted, and the paper concludes with a suggestion that financial sector lobbying should be reined in. It would be interesting to see the same work on the activities of those lobbying against regulation carried out in the UK – perhaps the Government’s better regulation unit could be tasked with the job?

The detail is in a 70-page Working Paper posted on Monday 28 December by the IMF (wonderfully titled “A Fistful of Dollars: Lobbying and the Financial Crisis” – who says IMF papers are dull and boring?) It concludes:

“With the caveat that empirical evidence cannot single out one interpretation as the true explanation, our analysis suggests that the political influence of the financial industry can be a source of systemic risk. Therefore, it provides some support to the view that the prevention of future crises might require weakening political influence of the financial industry or closer monitoring of lobbying activities to understand the incentives behind better.”

The digest at the beginning of the paper sets out the essential charge:

“Using detailed information on lobbying and mortgage lending activities, we find that lenders lobbying more on issues related to mortgage lending (i) had higher loan-to-income ratios, (ii) securitized more intensively, and (iii) had faster growing portfolios. Ex-post, delinquency rates are higher in areas where lobbyist’s lending grew faster and they experienced negative abnormal stock returns during key crisis events. The findings are robust to (i) falsification tests using lobbying on issues unrelated to mortgage lending, (ii) a difference-in-difference approach based on state-level laws, and (iii) instrumental variables strategies. These results show that lobbying lenders engage in riskier lending.”

It’s a fantastic paper, forensic and damning, which explores other, more innocent explanations for the data. Innocence is not what they found…..

“To the best of our knowledge, this is the first study to examine empirically the relationship between lobbying by financial institutions and mortgage lending in the run-up to the financial crisis. We construct a unique dataset combining information on mortgage lending activities and lobbying at the federal level by the financial industry. By going through individual lobbying reports, we identify lobbying activities on issues specifically related to rules and regulations of consumer protection in mortgage lending, underwriting standards, and securities laws.”

2 Responses to IMF report: banks that take biggest risks lobby for least regulation

  1. Tax Research UK » IMF report: banks that take biggest risks lobby for least regulation
    Dec 31st 2009, 8:06 am

    […] IMF report: banks that take biggest risks lobby for least regulation | ToUChstone blog: A public pol…. Although it probably shouldn’t surprise anyone, it’s nonetheless interesting to see a group of International Monetary Fund (IMF) staff have reported (although this is not a statement of IMF policy, necessarily) that the US banks most active in lobbying against regulation of the financial sector are the ones who took the biggest risks over the mortgage and other deals which caused the crisis. Their paper explores the evidence behind the… […]

  2. Absolutely fascinating
    Dec 31st 2009, 11:25 am

    […] Ritchie and the TUC are excited by this new IMF […]