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Enforcement actions and bank behavior

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  • Delis, Manthos D
  • Staikouras, Panagiotis
  • Tsoumas, Chris

Abstract

Employing a unique data set for the period 2000-2010, this paper examines the impact of enforcement actions (sanctions) on bank capital, risk, and performance. We find that high risk weighted asset ratios tend to attract supervisory intervention. Sanctions whose cause lies at the core of bank safety and soundness curtail the risk-weighted asset ratio, but amplify the risk of insolvency and returns volatility, which implies that these sanctions do not improve the risk profile of the involved banks, possibly because they come too late. Sanctions targeting internal control and risk management weaknesses appear to be well-timed and to restrain further increases in the risk-weighted assets ratio without impairing bank fundamentals. Sanctions against institution-affiliated parties do not seem to affect bank behavior. We suggest that supervisory attention should be placed on the timely uncovering of internal control and risk management deficiencies as this would allow the early tackling of the origins of financial distress.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 43557.

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Date of creation: 04 Jan 2013
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Handle: RePEc:pra:mprapa:43557

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Keywords: Enforcement actions; banking supervision; capital; bank risk; bank performance;

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References

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  1. Joe Peek & Eric Rosengren, 1993. "Bank regulation and the credit crunch," Working Papers, Federal Reserve Bank of Boston 93-2, Federal Reserve Bank of Boston.
  2. Rafael LaPorta & Florencio Lopez-de-Silanes & Andrei Shleifer, . "What Works in Securities Laws?," Working Paper 19491, Harvard University OpenScholar.
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  4. Delis, Manthos D & Staikouras, Panagiotis, 2009. "On-site audits, sanctions, and bank risk-taking: An empirical overture towards a novel regulatory and supervisory philosophy," MPRA Paper 16836, University Library of Munich, Germany.
  5. Gilbert, R. Alton & Vaughan, Mark D., 2001. "Do depositors care about enforcement actions?," Journal of Economics and Business, Elsevier, Elsevier, vol. 53(2-3), pages 283-311.
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  14. Mark J. Flannery & Kasturi P. Rangan, 2008. "What Caused the Bank Capital Build-up of the 1990s?," Review of Finance, European Finance Association, European Finance Association, vol. 12(2), pages 391-429.
  15. Randall S. Kroszner, 2000. "The economics and politics of financial modernization," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Oct, pages 25-37.
  16. Ekaterini Kyriazidou, 1997. "Estimation of a Panel Data Sample Selection Model," Econometrica, Econometric Society, Econometric Society, vol. 65(6), pages 1335-1364, November.
  17. Craig Furfine, 2001. "Bank Portfolio Allocation: The Impact of Capital Requirements, Regulatory Monitoring, and Economic Conditions," Journal of Financial Services Research, Springer, Springer, vol. 20(1), pages 33-56, September.
  18. Brous, Peter A & Leggett, Keith, 1996. "Wealth Effects of Enforcement Actions against Financially Distressed Banks," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, Southern Finance Association;Southwestern Finance Association, vol. 19(4), pages 561-77, Winter.
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