Forgive me all my sins: How penalties imposed on banks travel through markets

Mortgage-related bank penalties and systemic risk among U.S. banks

“…10 The authorities that reached a settlement with banks include the Department of Housing and Urban Development, the Department of Justice, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the Federal Reserve, the National Credit Union Administration, the Office of the Comptroller of the Currency, the Securities and Exchange Commission, several state attorneys, and the Attorney General. For an overview of major U.S. law enforcers and regulators, see Flore et al (2018) whose methodology related to misconduct results we follow and correspondingly, we do not distinguish between settlement or verdict as means of a case closure as the vast majority of cases is resolved through settlements. However, we do not assess potentially different impact of penalties on systemic risk with respect to the type of enforcement authority as we would be forced to work with number of fragmented subsamples; with a single exception (Office of the Comptroller of the Currency), Flore et al (2018) report statistically insignificant results linked to the type of enforcement authority.…”

“…The impact of bank penalties on stock prices and/or profitability is a focus of much research in the field and recent applications include Koester and Pelster (2017), Tilley et al (2017), and De Batz (2020a, 2020b. On the other hand, the link between penalties imposed on banks and systemic risk has been so far analyzed only by Koester and Pelster (2018) and indirectly also by Flore et al (2018). Koester and Pelster (2018) focus on the link between penalties to internationally listed banks and two measures of systemic risk: dynamic MES and daily ΔCoVaR.…”

“…We aim to build on the surveyed literature by incorporating the motivation of Koester and Pelster (2018) and Flore et al (2018) into a framework designed by Baruník and Křehlík (2018). In doing so, we aim to provide a comprehensive assessment of the propagation of risk in the U.S. banking industry in connection to the announcement of mortgage-related penalties and their settlements.…”

“…In this study, we analyze the link between mortgage-related regulatory penalties levied on banks in the United States and the level of systemic risk in the U.S. banking industry. In recent years, oversight and enforcement bodies in the U.S. have levied substantial penalties on banks in connection to their (mis)conduct during the pre-crisis years (Koester and Pelster, 2018;Flore et al, 2018). This pertains especially to global banks and their managements that are perceived by many as prime suspects responsible for the global financial crisis (Kalemli-Ozcan et al, 2013;McConnell and Blacker, 2013).…”

“…Despite of importance of the systemic risk propagation among banks, research on the link between penalties and systemic risk is negligible. So far, and to the best of our knowledge, it is represented by Koester and Pelster (2018) and Flore et al (2018); we review both expertly conducted analyses in more detail in the next section. Our analysis makes a new contribution to the literature as it provides assessment of the specific link between mortgage-related regulatory penalties levied on banks and the level of systemic risk in the U.S. banking industry.…”