A0360
Title: Does crime pay? The financial consequences of bank misconduct
Authors: Jose Fernandez de Bilbao - Universidad Pontificia de Comillas (ICADE) (Spain) [presenting]
Isabel Figuerola-Ferretti - ICADE - Universidad Pontificia Comillas (Spain)
Alvaro Santos Moreno - Bankia (Spain)
Ioannis Paraskevopoulos - Universidad Pontificia Comillas (Spain)
Abstract: A new approach is proposed to the study of the impact of bank misconduct on bank profitability. Most papers addressing this topic have traditionally used the announcement of fines and penalties received as the key independent variable to determine bank misconduct. On this basis, they have reached contradictory conclusions, including that misconduct has no significant impact on the bank's after-tax profitability. We argue that P\&L misconduct costs and provisions are a more appropriate variable for bank misconduct. In order to support our position, we show that bank accounting rules force banks to accrue for misconduct costs several periods before the announcement of a fine or penalty and that fines and penalties do not fully capture the full breadth of misconduct costs incurred by banks. We apply our proposed variable to estimate a Generalized Method of Moments (GMM) regression model on a dynamic panel data sample of Global Systemically Important Banks. Our analysis shows that bank misconduct does have a significant and strong impact on both pre-tax and after-tax profitability and that misconduct costs do not have any significant effect on effective tax rates. These results have both regulatory and social implications as they provide evidence that banks do suffer negative financial consequences from their misbehaviour.