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Article
Publication date: 19 March 2018

Hannes Köster and Matthias Pelster

The purpose of this paper is to analyze the impact of financial penalties on the stability of the banking sector.

Abstract

Purpose

The purpose of this paper is to analyze the impact of financial penalties on the stability of the banking sector.

Design/methodology/approach

A unique database of 671 financial penalties imposed on 68 international listed banks between 2007 and 2014 and a fixed-effects panel data approach were used.

Findings

The results show that financial penalties increase banks’ systemic risk exposure but do not significantly affect banks’ contribution to systemic risk. Additionally, the link between financial penalties and systemic risk exposure is weaker in regulatory and supervisory systems with more prompt corrective power among national authorities. By contrast, supervisory authorities’ stronger power to declare insolvency and a greater external monitoring culture exacerbate the positive effects of financial penalties on systemic risk exposure.

Practical implications

The punishment of misconduct should correct the social harm and prevent future misconduct while ensuring the banking system’s stability. Therefore, authorities should punish misconduct by implementing penalties against the financial institutions at a specific amount that offsets the damages of misconduct but does not threaten systemic stability. Penalties against institutions may be complemented by financial penalties against upper management to induce a more responsible culture in banks.

Originality/value

This paper is the first to study the effect of financial penalties on the stability of the financial system. The results contribute to the ongoing debate on the appropriateness of financial penalties and address the question of whether bank regulators reduce or contribute to banks’ systemic risk.

Details

The Journal of Risk Finance, vol. 19 no. 2
Type: Research Article
ISSN: 1526-5943

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