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    IMF Paper Examines If Bank Lobbying in US Leads to Regulatory Capture

    August 09, 2019

    IMF published a working paper on whether and how bank lobbying in the United States can lead to regulatory capture and can have real consequences. The paper discusses the importance of bank lobbying in the United States, along with the motivations behind bank lobbying by outlining a conceptual framework of regulatory capture. It also examines the impact of lobbying on financial regulation and supervision by reviewing recent empirical evidence. The findings of the study are consistent with regulatory capture, which lessens the support for tighter rules and enforcement. While the findings should not be interpreted as a call for an outright ban of lobbying, they point in the direction of a need for rethinking the framework governing interactions between regulators and banks.

    Among other things, the paper presents evidence on the effect of the rising political influence of the banking industry on the global financial crisis. It summarizes the recent, systematic evidence on the banking industry capturing the government through its lobbying activities. The focus of the paper is on financial regulation, supervision, and outcomes during the global financial crisis. The overall findings are consistent with a regulatory capture view of bank lobbying. This in turn allows riskier practices and worse economic outcomes. The evidence provides insights into how the rising political power of banks in the early 2000s propelled the financial system and the economy into crisis. The findings point in the direction of a need for rethinking the framework governing interactions between regulators and the industry, including their lobbyists. 

    The authors stressed on two avenues that they believe are crucial to contain regulatory capture at more “acceptable” levels—that is, levels at which the benefit of regulation exceeds the cost of regulatory capture:

    • The first avenue is to enhance the transparency of regulatory decisions by mandating the ex-post disclosure of how they are made. The systematic, ex-post disclosure of information on regulatory decisions would increase regulators’ accountability both toward the general public and toward other (potentially competing) parties.
    • The second avenue is about placing checks and balances in the decision-making process at regulators. Implementing structures of checks and balances involving the less politically powerful interest groups would induce a re-balance of the dominant position currently held by the banking industry. 

     

    Related Link: Working Paper

    Keywords: Americas, US, Banking, Bank Lobbying, Regulatory Capture, Regulation and Supervision, Research, Deregulation in US, IMF

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