Lobbying, Regulatory Enforcement and Corporate Governance: Theory and Evidence from Regulatory Enforcement Actions against US Banks

Giota Papadimitri () and Ansgar Wohlschlegel

No 2019-08, Working Papers in Economics & Finance from University of Portsmouth, Portsmouth Business School, Economics and Finance Subject Group

Abstract: We explore protection against enforcement as a motive for lobbying and present evidence for bank holding companies with good corporate governance but a poorly performing portfolio of subsidiaries to be more likely to lobby. A simple theoretical model of lobbying as a means for banks to communicate otherwise private information on their quality rationalizes regulators' responsiveness to lobbying, even though lobbying banks inadvertently expose themselves as violators of the regulation. Using a composite governance indicator as a proxy for a bank's quality, we take the hypotheses from the model to a panel dataset of 173 large bank holding companies and their subsidiaries. In line with the theoretical hypotheses, we find that subsidiaries of lobbying, high-governance parent companies are less likely to receive a regulatory enforcement action, but the reverse is true for poor-governance parent companies. Furthermore, banks whose parent companies have lobbied perform better (worse) after five years if the bank holding has a high (low) governance indicator. On a policy note, our paper highlights a potential benefit of the lobbying system and makes the case for carefully designed incentives and commitment powers of bank regulators in order to make the most of this benefit.

Keywords: Lobbying; enforcement; bank regulation; corporate governance (search for similar items in EconPapers)
JEL-codes: D72 G28 G34 K42 (search for similar items in EconPapers)
Pages: 42
Date: 2019-07-31
New Economics Papers: this item is included in nep-ban, nep-cdm, nep-law and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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