Banks facing regulatory sanctions for financial misconduct tend to adopt riskier business practices, according to new research.
Banks facing regulatory sanctions for financial misconduct tend to adopt riskier business practices, according to new research.
The authors warn repeated or systemic misconduct can accelerate risk-taking in ways that weaken both individual institutions and the wider financial system.
Researchers from the University of East Anglia (UEA), the US Department of the Treasury and Bangor University, in the UK, drew on data from nearly 1,000 publicly listed US banks from 1998 to 2023—a period spanning multiple economic cycles, including the 2007–09 financial crisis.
Their findings, published in the Journal of Banking & Finance, show that banks referred to authorities for violations—ranging from misrepresentation to failures in anti-money-laundering systems—are significantly more likely to engage in risk-heavy strategies and speculative lending.
Board characteristics can make a difference, with larger and more independent boards, particularly those with older or gender-diverse membership, often dampening the negative impact of misconduct.
However, if CEOs hold extensive power or if short-term focused institutional investors hold large stakes, even robust boards may struggle to rein in risky behavior.
