The politics of bank bailouts

Abstract

In this thesis, I show that governments bail out banks because banks are critical to capitalist democracies. Banks enjoy a public safety net. Governments, however, can make banks pay for this protection. Two of this dissertation’s conclusions stand out. The first is that the influence of business through lobbying and other channels of instrumental power is exaggerated. Banks cannot secure sweetheart deals by pointing to their track record of campaign contributions. Bailouts are not for sale. During crises, governments can use banks’ dependence on the domestic market to force them to bear the bailout costs. Only highly international banks, can parry this threat by using their structural power strategically. The second conclusion is that financial crises remove veto points. They create a large threat and leave little time for deliberation, which prompts lawmakers defer to the executive branch. Thus, financial crises shift power from legislatures—even strong ones, like the US Congress—to the head of government.