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Enforcement actions and bank behavior

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

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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File URL: http://mpra.ub.uni-muenchen.de/43557/1/MPRA_paper_43557.pdf
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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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  1. 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, vol. 19(4), pages 561-77, Winter.
  2. Aviv Nevo & Adam M. Rosen, 2008. "Identification with Imperfect Instruments," NBER Working Papers 14434, National Bureau of Economic Research, Inc.
  3. Lars Norden & Martin Weber, 2010. "Credit Line Usage, Checking Account Activity, and Default Risk of Bank Borrowers," Review of Financial Studies, Society for Financial Studies, vol. 23(10), pages 3665-3699, October.
  4. Demirguc-Kunt, Asli & Detragiache, Enrica, 2009. "Basel core principles and bank soundness : does compliance matter ?," Policy Research Working Paper Series 5129, The World Bank.
  5. Randall S. Kroszner, 2000. "The economics and politics of financial modernization," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 25-37.
  6. Ekaterini Kyriazidou, 1997. "Estimation of a Panel Data Sample Selection Model," Econometrica, Econometric Society, vol. 65(6), pages 1335-1364, November.
  7. Milne, Alistair, 2002. "Bank capital regulation as an incentive mechanism: Implications for portfolio choice," Journal of Banking & Finance, Elsevier, vol. 26(1), pages 1-23, January.
  8. Manthos D. Delis & Panagiotis K. Staikouras, 2011. "Supervisory Effectiveness and Bank Risk," Review of Finance, European Finance Association, vol. 15(3), pages 511-543.
  9. Kaufman, George G., 1995. "FDICIA and bank capital," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 721-722, June.
  10. Peek, Joe & Rosengren, Eric, 1995. "Bank regulation and the credit crunch," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 679-692, June.
  11. Rafael Porta & Florencio Lopez-De-Silanes & Andrei Shleifer, 2006. "What Works in Securities Laws?," Journal of Finance, American Finance Association, vol. 61(1), pages 1-32, 02.
  12. R. Alton Gilbert & Mark D. Vaughan, 2000. "Do depositors care about enforcement actions?," Working Papers 2000-020, Federal Reserve Bank of St. Louis.
  13. Craig Furfine, 2001. "Bank Portfolio Allocation: The Impact of Capital Requirements, Regulatory Monitoring, and Economic Conditions," Journal of Financial Services Research, Springer, vol. 20(1), pages 33-56, September.
  14. Paul H. Malatesta & Kathryn L. DeWenter, 2001. "State-Owned and Privately Owned Firms: An Empirical Analysis of Profitability, Leverage, and Labor Intensity," American Economic Review, American Economic Association, vol. 91(1), pages 320-334, March.
  15. Mark J. Flannery & Kasturi P. Rangan, 2008. "What Caused the Bank Capital Build-up of the 1990s?," Review of Finance, European Finance Association, vol. 12(2), pages 391-429.
  16. Frederic S. Mishkin, 2000. "Prudential Supervision: Why Is It Important and What are the Issues?," NBER Working Papers 7926, National Bureau of Economic Research, Inc.
  17. R. Alton Gilbert, 1993. "Implications of annual examinations for the Bank Insurance Fund," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 35-52.
  18. 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.
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