Financial Penalties and the Systemic Risk of Banks

Abstract

This study analyzes the impact of financial penalties on the stability of the banking sector. Using a unique database of 671 financial penalties imposed between 2007 and 2014 on 68 international listed banks, we study the impact of financial penalties on the systemic risk of banks. We obtain evidence for a significant negative relation between financial penalties and banks’ systemic risk exposure but not between financial penalties and banks’ systemic risk contribution. We also demonstrate that the characteristics of the regulatory and supervisory system of a given country affect the relation between financial penalties and banks’ systemic risk exposure. Our results contribute to the ongoing debate on the appropriateness of financial penalties and address the question whether bank regulators limit or contribute to banks’ systemic risk.