The spillover effect of enforcement actions on bank risk-taking

Abstract

Enforcement actions (sanctions) aim to penalize guilty companies and provide examples to other companies that bad behavior will be penalized. A handful of papers analyze the consequences of sanctions in banking for sanctioned companies, while no papers have investigated the spillover effects on non-sanctioned banks. Focusing on credit-related sanctions, we show the existence of a spillover effect: non-sanctioned banks behave similar to sanctioned banks, depending on their degree of similarity, offloading problematic loans and reducing their lending activity. JEL Classification: G20; G21; G32

Frequency vs. Size of Bank Fines in Local Credit Markets

“…Breaches related to credit risk disclosure and management, internal controls, conflict of interest and governance were aggregated under the rubric of credit and credit-related violations (BC), whereas breaches related to money laundering, salary and compensation, transparency, and controls exercised by the Supervisory Board were grouped under the rubric of non-credit violations (BO). Our classification is somewhat similar to that by Caiazza et al (2018) but differs in that we have a more expansive list of breaches. 9 Furthermore, in our empirical work we treat fines both as dummy variables and pecuniary values, whereas Caiazza et al (2018) use only dummy variables.…”

“…However, these adverse effects on the real economy seem to be temporary and typically last 1 year. Finally, analyzing the Italian case, Caiazza et al (2018) focus on spillovers of enforcement actions on non-sanctioned banks under the assumption that sanctions serve the twin objectives of penalizing the offending banks and warning other banks. The authors find that credit risk-related fines assessed on Italian banks reallocate lending in a way that non-sanctioned banks tend to behave more similarly to sanctioned bank, evidence bearing on our reallocation effect channel.…”

Cultural Differences as a Reason for Failure of Investment Projects in the Polish Banking Sector

“…This means that the final sample comprised 31 investment projects: 16 mergers and acquisitions and 15 cases where new banks were established (Table 1). In all the 31 cases, similarly as in the case of most research projects of this kind [37][38][39], our measurement for levels of individual banks' risktaking is the time-varying Z-score, which is calculated as follows:…”

When LIBOR becomes LIEBOR: Reputational penalties and bank contagion

“…(2009, p. 195) claim that “individuals observe a single act of deviance, interpret it as potentially harmful or contrary to social norms, and proceed to incorporate the possibility of such events into their general knowledge about organizations.” They provide evidence that there are three ways through which generalization can be channeled and reputational penalties can be imposed on nonaffiliated firms: through a shared organizational form, across organizational forms with similar characteristics, and across organizations with characteristics made salient by fraudulent act. Caiazza, Cotugno, Fiordelisi, and Stefanelli (2018) study the effects of sanctions on sanctioned banks and document a spillover effect on nonsanctioned banks that have features similar to those of sanctioned banks.…”