The Political Economy of Bank Fines: An empirical analysis of enforcement risk

This paper deals with the regulatory risk faced by banking institutions. Concretely, the paper investigates empirically the drivers of regulatory enforcement risk in different jurisdictions by looking at (1) the probability that a bank will face a financial penalty and (2) the amount of the financial penalty received. Regulators enjoy leeway when it comes to the definition of enforcement policies. The paper innovates by looking at how regulators’ incentives affect firms’ enforcement risk. Adopting a political economy perspective, the paper explores the extent to which regulators’ characteristics (institutional architecture, structural power) and bank ownership (domestic vs foreign; private vs government-owned) affect the way in which regulators punish banks for misconduct. Financial penalties against the top 1000 banks of the world are investigated by means of quantitative methods. The study adopts a global approach by covering financial regulators from Western Europe, US, Asia and Latin-America during the period 2010-2020.