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

Abstract

We analyze link between mortgage-related regulatory penalties levied on banks and the level of systemic risk in the U.S. banking industry. We employ a frequency decomposition of volatility spillovers to draw conclusions about system-wide risk transmission with short-, medium-, and long-term dynamics. We find that after the possibility of a penalty is first announced to the public, long-term systemic risk among banks tends to increase. Short-and medium-term risk marginally declines. In contrast, a settlement with regulatory authorities leads to a decrease in the long-term systemic risk. Our analysis is robust with respect to several criteria.

Do not mention Russia: A theoretical framework for bank penalties due to economic sanction violations and policy implications

“…scribed by knowledge based on the experience of the individual concerned was first discussed by Ramsay (2016) 3 . In addition, Savage (1954) describes a model of decision-making in differing subjective contexts of risk in his theory of "Subjective Expected Utility".…”

“…However, also financial penalties from regulatory authorities can be added to this list as they have been a part of banks' daily life since the outburst of the global financial crisis in 2007, much more than before it (Emmenegger, 2015;Garrett, 2016;Flore et al, 2021). Also, nothing signals that the future will be any different in this regard (Brož & Kočenda, 2022).…”

“…This includes the pertinent question of the effectiveness of regulatory enforcement. The only relevant empirical findings, however, suggest that regulatory penalties might not help in changing banks' behavior as there is typically a significant time lag between the misconduct and the penalty (Brož & Kočenda, 2022). Also, the intention of regulators is most likely not to fatally affect the banks' operations as they consider the importance and interconnectedness of the banking sector when deciding about a potential criminal prosecution (Flore et al, 2021).…”

Frequency volatility connectedness and portfolio hedging of U.S. energy commodities

“…(1 -5 days), medium-term (5 -20 days), and long-term (20 -200 days). These intervals reflect a business week, a business month, and a business year, respectively, and represent investment horizons of corresponding length (Baruník and Kočenda, 2019;Brož and Kočenda, 2022).…”

“…Similar approaches were recently adopted in the literature to analyze time-varying exchange rate co-movements and volatility spillovers in the forex market (Kočenda and Moravcová, 2019), the systemic risk in the U.S. banking industry (Brož and Kočenda, 2022), volatility spillovers across precious and industrial metal markets , and the time-frequency dynamics of volatility spillovers among major stock indices during the Covid-19 pandemic (Wang et al, 2022). Markowitz (1991), in his optimal portfolio theory, defines the optimal portfolio, which maximizes the expected return considering a certain level of market risk.…”