Lobbying with Lawyers: Financial Market Evidence for Banks’ Influence on Rulemaking

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How do business firms shape regulation? Can firms use administrative procedures to influence the regulatory environment in which they operate, and how would we know if they were successful? We explore these questions by analyzing the commenting activity of financial entities in Dodd-Frank related rulemaking at the Federal Reserve. Using intra-day event-study methods, we find favorable market reactions around rule announcements associated with participation in rule-making. In response to a rulemaking event, and compared to nonparticipants, commenting banks obtain asset price returns at the 55th to 62nd percentile of ranked returns. Observed Federal Reserve rulemaking participation by publicly-traded banks accounts alone for $7 billion in excess returns in the post-Dodd Frank era. The aggregated influence of firms in financial regulation may be far larger. Closer examination of two rules—Volcker Rule and the debit card interchange fee rule—suggests that these valuations are driven by changes in rules moved by comments. The results illuminate new dimensions of political inequality, namely the differential ability of interests to mobilize legal expertise. They also establish new measures of industry influence in regulatory politics, especially in rulemaking.