Foreign Exchange Manipulation and the Equity Returns of Global Banks

We investigate the valuation effects of foreign exchange manipulation for seven systemically important banks that settled with regulators and legal authorities. The seven settlement banks suffer a total market value loss of $48 billion that far exceeds the $10 billion in regulatory and criminal fines. We attribute the difference of $38 billion to a market-imposed reputational penalty, which we define as the expected decline in the present value of future cash flows due to higher regulatory and financing costs and lower revenues. However, only five of the seven settlement banks experience reputational penalties that are higher than the assessed fines. Our evidence suggests that the market responds differentially based on the distinctive circumstances related to each institution’s involvement. We also find evidence of negative valuation effects for other competing global banks that are more pronounced for those banks that have greater systemic importance and control a greater share of the foreign exchange market.