The effects of violating banking regulations on the financial performance of the US banking industry

Purpose – The purpose of this paper is to examine the effects of corporate illegality on financial performance within the banking industry, in order to assess whether the regulatory framework is effective in curbing violations. Design/methodology/approach – The operating performance of 84 publicly traded US banks that were subject to enforcement actions from US regulatory authorities over a 20-year period were examined. Performance of each violating bank was analyzed several quarters after each violation and compared to a performance benchmark of non-violating competitors. Findings – Contrary to prior studies that show a negative effect of illegality on performance, the results of this investigation failed to show any significant and sustained effect of enforcement actions. This could be due to the unique situation of the banking industry. Nevertheless, the degree of impact depended on firm attributes, as smaller and riskier firms were affected more than others. Research limitations/implications – The paper is restricted to the US market, which is characterized by a special regulatory framework. Future research could investigate the issue in other markets. Also, this study does not differentiate with respect to the type of violation or seriousness of offense. Future studies could control for those issues. Practical implications – The results of this study shed some insight on the effectiveness of regulations in the banking industry and suggest that regulators and policy makers should tighten-up the sanctions and speed-up the process. Originality/value – This paper differs from other studies that investigate the effect of illegality on financial performance by focusing on a single and highly regulated industry that has unique characteristics.