The Effects of Sanctions on the Lending Policy and the Value of International Banks: the Case of Iran

Abstract

Abstract After being in force for several years, sanctions against Iran were partly lifted on 16 January 2016, reopening business options for the financial industry. This paper investigates whether a breach of internationally imposed economic sanctions had a negative impact on the value of a bank that decided to implicitly or explicitly violate those sanctions. Using event study methodology, our analysis provides evidence that a breach of Iran-related sanctions by foreign banks caused considerable wealth reductions for their shareholders who finally bear the corresponding fining-costs. The results also show that bank shareholders do not perceive the lifting of sanctions as being good news, implying that they lost faith in their bank’s ability to establish a sufficient compliance and due diligence system for Iran-related transactions. Finally, the study shows that the announced fining for a breach of sanctions does not induce spillover effects to non-fined banks. Thus, the study provides important insights on reasons of the current shortage of foreign lending toward Iran.