The effects of political connections in banking

Abstract

The determinants and eects of political connections in banking have received extensive attention from academics and policymakers, especially after the outburst of the global financial crisis. The overarching theme and primary objective of the present thesis is to contribute to the aforementioned stream of research by attempting to answer the following question: What is the role of political connections in the banking sector? The output of this thesis contributes to the extant knowledge in three ways. First, it sheds light on whether and how less direct channels of political influence impact regulatory enforcement. Second, it provides a solid explanation in regard to the motives behind lobbying, as well as evidence on how successful it can be for the lobbying firm. Third, it provides evidence on the impact of political connectedness on banking sector profitability under a cross-country scope. To do this, the thesis includes three substantive chapters, each of which examines a certain topic that falls under the above common thematic area. The first two chapters have a narrower focus in the sense that they aim to provide evidence regarding how certain types of political connections influence bank-level regulatory outcomes. The first chapter (Chapter 3) uses a data set of the universe of US Commercial Banks over the period 2000-2015 and shows that being headquartered in a state where an elected official holds a chair position on a Congressional committee related to the banking and financial services industry, reduces a bank’s probability of receiving a formal regulatory enforcement action. This pattern appears to be conditional to certain state-level characteristics, such as economic freedom, corruption, religiosity and political polarization. The second chapter (Chapter 4) aims to shed light on certain fundamental patterns between lobbying and regulatory enforcement in the banking industry by making use of a theoretical model, which yields a set of predictions which are tested empirically. Using a panel data set of 173 large US Bank Holding Companies and their subsidiaries for the years 2002-2017, the findings show that Bank Holding Companies with good corporate governance but a poorly performing portfolio of subsidiaries are more likely to lobby. Moreover, it appears that subsidiaries of lobbying, high governance parent companies are less likely to receive a regulatory enforcement action, but the opposite is true for poor-governance parent companies. The final chapter (Chapter 5) intends to provide evidence regarding the broader eect that political connections may have on a country’s banking sector performance. Using a sample of 59 countries over the years 2003-2007, the main findings suggest that, as political connectedness increases, banking sector performance increases as well. The results of the study are retained when addressing endogeneity concerns. Moreover, findings are robust for a set of alternative sensitivity tests including alternative model specification, sample restriction, as well as controlling for additional country-level characteristics.

Date of Award	Oct 2019
Original language	English
Awarding Institution	University of Portsmouth
Supervisor	Ansgar Wohlschlegel (Supervisor) & Gioia Pescetto (Supervisor)