Enforcement actions, market movement and depositors’ reaction: evidence from the US banking system

Malafronte, Irma, Nurullah, Mohamed, Pereira, John and Sorwar, Ghulam (2016) Enforcement actions, market movement and depositors’ reaction: evidence from the US banking system. In: 6th International Conference of the Financial Engineering and Banking Society: Banking, Finance and Institutions: Stability and Risk; 10-12 Jun 2016, Malaga, Spain. (Unpublished)


Using an extensive dataset of manually collected enforcement actions (EA) on US banks, we provide new empirical evidence on the impact of EA announcements on key bank stakeholders, i.e. equity market and depositors, over the period 01/01/2004-31/08/2015. The main results, from event study and multivariate analyses, show that equity market is able to discriminate EAs based on their severity. Market reacts negatively following severe EAs (cease and desist), while weak reaction is noted for other EA types (civil money penalty and formal agreements). Depositors show different behaviour depending on the type of sanction and deposit considered. Demand depositors exhibit some level of depositor disciplining mechanism following cease and desist announcements, while saving depositors seem to reward sanctioned banks for a higher return. A positive effect is found following formal agreement announcements, that seem to be perceived as a corrective mechanism. We validate these findings across the sanctioned (treatment) and comparable non-sanctioned banks (control), identified using propensity score matching methodology, as well as through other robustness checks. By providing an in depth empirical analysis on the effect of supervisory actions on key bank stakeholders, this study expands the existing knowledge on the consequences of banking supervision to guide banks’ behaviour, drive policy interventions and contribute to enhance supervisory effectiveness.

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