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current projects

Market Discipline Effects of Anti-Money Laundering Infractions: Evidence from International Banks

Joint work with Sandra Tillema (University of Groningen)

Banks have to comply with regulations that aim at preventing money laundering and terrorist financing. We investigate the effects of news articles that report on banks which fail to comply with anti-money laundering (AML) rules, and study whether banks’ stakeholders strengthen the effects of regulatory discipline. We find that stock prices decline significantly when news related to AML violations is released and these declines are substantially larger than the financial penalties that regulators impose. To test which market discipline channels are at work, we study mutual funds’ holdings in banks, banks’ noninterest income and deposits. The former two decline significantly after news related to AML violations is released. Our findings further support the idea that the combination of regulatory and market discipline leads to improvements in banks’ operational risk management systems, as bribery, corruption and fraud controversy scores of banks improve after violations have been detected. More generally, our study highlights that regulatory discipline does not undermine but promotes market discipline.

 

Islamic versus conventional banks: Who better absorbs the COVID-19 shock?

Joint work with Amal AlAbbad (LaPenta School of Business)

We investigate how banks’ income and market value in dual-banking countries respond to the COVID-19 pandemic. We postulate that Islamic banks are better protected against this exogenous shock because of their profit-and-loss-sharing arrangements. Applying difference-in-differences, we document that Islamic banks have higher changes in interest income and net interest income than their country- and size-matched conventional banks. We do not find that Islamic banks distribute higher interest income to their shareholders, but rather they have higher loan loss provisions than conventional banks in the course of the pandemic. The latter effect is best explained by an income smoothing motive as asset quality does not differ between Islamic and conventional banks. Applying event-study tests, we find that Islamic banks’ stock prices respond more positive to the announcement of income support than conventional banks, but not to workplace closures and specific banking measures. Thus, the strength of the profit-and-loss-sharing arrangements are not reflected in stock price responses.

 

Emotional Stock Price Responses from Being Inferior: Evidence from European Soccer Matches

Joint work with Jarmo van Beurden

This paper examines whether being inferior to others leads to emotional stock price responses following positive and negative information shocks. We consider the case of soccer clubs participating in Champions and Europa League fixtures between February 2004 and March 2020 because the same club is inferior in some matches and superior in others depending on the strength of the opponent club. After a positive information shock, the stock price response of a weak club in our sample is more positive, when it wins against a strong opponent than when it wins against a weak opponent. The strength of the return club alone does not affect the stock price response. We argue that investors’ emotions, like euphoria, pride and happiness, are more stirred in the former than in the latter case, and therefore the stock price responds more positive. Since soccer outcomes may seem specific, we outline the general applicability of emotional responses when being inferior in several finance settings.

 

Bank Foreign Assets, Government Support and International Spillover Effects

Joint work with Nils Moch (University of Lüneburg)

We study international spillover effects of a sovereign rating change to stock returns of large banks in non-event countries. Using S&P rating assessments from 1983 to 2018, we find that stock returns of large banks respond stronger to foreign sovereign downgrades than foreign stock markets in general. We attribute this stronger response to the special role large banks play in the international financial system. We show that the international spillover strength increases with banks’ foreign sovereign debt holdings as well as with their foreign claims to banks and non-banks, while it decreases with banks’ expected government support. The latter result indicates that expected government support shields internationally active banks from value destroying spillover effects of foreign sovereign downgrades.

 

Risk committees, Basel regulation and bank risk taking in dual banking systems

Joint work with Amal AlAbbad (LaPenta School of Business)

We investigate empirically whether banks in dual banking countries more likely install risk committees after Basel disclosure requirements have been implemented. Using a hand-collected sample of Islamic banks and matched conventional banks, we find that Basel disclosure requirements make it more likely that banks establish risk committees. After a risk committee has been formed, risk taking of banks declines. These findings suggest that risk-based capital regulation does not only directly affect banks’ risk taking, but it also influences bank risk governance, which in turn affects risk taking. While Islamic banks, due to their compliance to Islamic law, or Shariah, are less likely to establish risk committee than conventional banks, the two show similar responses to changes in regulatory disclosure requirements.

 

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