Do not mention Russia: A theoretical framework for bank penalties due to economic sanction violations and policy implications

Abstract

In this paper, penalties to banks violating economic sanctions have been investigated and discussed. This topic has sparked renewed interest and attention following the beginning of the conflict in Ukraine due to the Russian aggression in February 2022 and the ongoing general deterioration in the global economic climate. Thus, based on the experience with penalties to banks for violations of economic sanctions from 2007, a theoretical model has been proposed. It is proposed that this model may be informative in devising the optimal level of penalties based on behavioral characteristics of banks and regulators. The model is based on the economic examination of the motives and incentives for bank misconduct, by drawing on the Shapiro-Stiglitz model addressing typical consequences of asymmetric information in principal-agent models. From a policy perspective, the proposed model also has the potential to provide opportunities for standardization of restrictions posed on banks as a result of bank misconduct. Relevant policy implications concerning penalties are put forward that may be implemented for future considerations, particularly in cases related to violations of economic sanctions.

The impact of announcements of regulatory and law enforcement penalties on stock market valuation of US banks from 2000 to 2022

“…First, penalty announcements do not lead to a significant negative impact on bank stock prices. While this is in line with existing literature (as discussed in Section 2), it provides reassurance to policymakers that they should not refrain from imposing penalties because of potential adverse market reactions (Brož et al. , 2023).…”

“…First, penalty announcements do not lead to a significant negative impact on bank stock prices. While this is in line with existing literature (as discussed in Section 2), it provides reassurance to policymakers that they should not refrain from imposing penalties because of potential adverse market reactions (Brož et al, 2023). Second, the relatively mild market reaction to penalty announcements suggests that regulators and law enforcement agencies may need to consider stricter penalties to ensure the effectiveness of their actions (Köster and Pelster, 2017;De Batz, 2020).…”

“…This results in an unprecedented number of penalties imposed on banks [5]. Specifically, our sample includes penalties related to banks' misconduct [6] during the GFC, as well as those stemming from the LIBOR scandal, the foreign exchange market manipulation scandal and several prominent cases of facilitating economic sanction evasion by banks (Carvalho, 2018;Pilbeam, 2018;Brož and Ko cenda, 2022;Brož et al, 2023). Moreover, the VT database allows us to work with variables related to bank penalties, as described in Section 4.3.…”

“…Among non-USA-based banks, European banks stand out (Table 3). Furthermore, while most investigations against banks resulting in penalties are categorized as civil, there are also cases involving criminal proceedings (Brož et al. , 2023).…”