What Is the Impact of Financial Penalties on the Performance and Stock Returns of Banks?

Opinions on the impact of financial penalties on the profitability of banks are divided: One view argues that they obstruct the functioning of the banking sector; another one says that these penalties are simply another cost of doing business. MATTHIAS PELSTER and his research group have investigated the impact of penalties on the performance of banks in an empirical study in order to properly differentiate between the competing opinions. They examined the profitability and the stock returns of a sample of large internationally listed banks that were imposed with financial penalties. They found that there is a negative relation between penalties and pre-tax profitability and a lower income in the years following the penalty. However, taking a look at the stock performance of these banks, they could detect a positive relation of the stock returns to the announcement of penalties.