Social Capital and Bank Misconduct

Abstract

This paper shows that US banks headquartered in areas with higher social capital (as captured by civic norms and social networks) are less likely to receive enforcement actions from bank regulators. This negative association is explained by the lower propensity of these banks to engage in misconduct rather than by a lower probability of misconduct being detected, and is mostly significant for less geographically dispersed banks. Consistent with a lower tolerance for bank misconduct in areas with higher social capital, I document that after receiving an enforcement action for misconduct, banks experience greater reductions in deposit growth in counties with higher social capital. This article offers novel insights indicating that social capital provides environmental influences constraining bank misconduct.