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Do fines imposed on U.S. banks pose a systemic risk? Research published in JIMF

04/07/2022

Our colleague, Professor Evžen Kočenda and our alumnus, Václav Brož, have published their research in a high quality journal devoted to theoretical and empirical research in the fields of international monetary economics and international finance, Journal of International Money and Finance. Their article Mortgage-related bank penalties and systemic risk among U.S. banks is available in full length here.  

The authors analyze the connection between mortgage-related regulatory penalties levied on banks in the United States and the level of systemic risk in the U.S. banking industry during the post-crisis period (2010–2016). They found out that while the risk does not increase immediately after the imposition of fines, it is cumulative and spreads throughout the whole banking sector in the long term.

Abstract

We analyze link between mortgage-related regulatory penalties levied on banks and the level of systemic risk in the U.S. banking industry. We employ a frequency decomposition of volatility spillovers (connectedness) to assess system-wide risk transmission with short-, medium-, and long-term dynamics. We find that after the possibility of a penalty is first announced to the public, long-term systemic risk among banks tends to increase. From the dynamic perspective, bank penalties represent an overlooked risk as they do not increase systemic risk immediately, but the risk accumulates and propagates over the long term. In this respect, bank penalties resemble still waters that run deep. In contrast, a settlement with regulatory authorities leads to a decrease in the long-term systemic risk. Our analysis is robust with respect to a number of relevant criteria.


 

Autor - Barbora Holková

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