DP14243 Too many Voters to Fail: Influencing and Political Bargaining for Bailouts

Author(s): Linda Marlene Schilling
Publication Date: December 2019
Keyword(s): bail-outs, Capital Structure, Corporate Finance, Economic voting, influencing, political economy
JEL(s): D72, G3, P16
Programme Areas: Public Economics, Financial Economics, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14243

The paper provides a novel theory of how banks not only exploit but also cause being perceived as 'too big to fail'. Bank creditors are also voters. Economic voting prompts politicians to grant bailouts given a bank failure. The bank's capital structure acts as a tool to impact the electoral vote and thus the bail-out by changing the relative group size of voters who favor as opposed to voters who object the bailout. The creditors' anticipation of high bailouts, in return, allows the bank to reduce funding costs today, by this maximizing revenues.