Abstract
We investigate the valuation effects of foreign exchange manipulation for seven systemically important banks that settled with regulators and legal authorities. The seven settlement banks suffer a total market value loss of $48 billion that far exceeds the $10 billion in regulatory and criminal fines. We attribute the difference of $38 billion to a market-imposed reputational penalty, which we define as the expected decline in the present value of future cash flows due to higher regulatory and financing costs and lower revenues. However, only five of the seven settlement banks experience reputational penalties that are higher than the assessed fines. Our evidence suggests that the market responds differentially based on the distinctive circumstances related to each institution’s involvement. We also find evidence of negative valuation effects for other competing global banks that are more pronounced for those banks that have greater systemic importance and control a greater share of the foreign exchange market.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
See the following article for additional details: https://financial.thomsonreuters.com/en/products/data-analytics/market-data/financial-benchmarks/currency-benchmarks-fx-spot-rates.html
See, for example The New York Times article entitled “Big Banks Are Fined $4.25 Billion in Inquiry Into Currency-Rigging” November 12, 2014, by Chad Bray, Jenny Anderson, and Ben Protess
For more details on how the WM/ Reuters bench mark rates are fixed, see this link: https://financial.thomsonreuters.com/en/products/data-analytics/market-data/financial-benchmarks/spot-rates.html
See the following Financial Times article for additional information: https://www.ft.com/content/8bfcd38c-b0d6-11e3-bbd4-00144feab7de
We acknowledge that there are direct costs of complying with regulatory sanctions and/or dealing with increased regulatory oversight that extend beyond the criminal and civil penalties.
This quote is from a Bloomberg article discussing the rigging of currency rates, which is available on the following link: http://www.bloomberg.com/news/articles/2013-06-11/traders-said-to-rig-currency-rates-to-profit-off-clients
The US Department of Justice issued a press release on May 20, 2014, announcing the settlement.
See the following article in The New York Times for more details on the proposed criminal settlement: https://www.nytimes.com/2015/05/14/business/dealbook/5-big-banks-expected-to-plead-guilty-to-felony-charges-but-punishments-may-be-tempered.html
On November 12, 2014, The New York Times published an article entitled “Big Banks Are Fined $4.25 Billion in Inquiry Into Currency-Rigging” that was written by Chad Bray, Jenny Anderson, and Ben Protess
Please see the following link for the Euromoney FX Survey 2013 as well as the surveys for other years: https://www.euromoney.com/article/b12kjtpnpcdxmp/fx-survey-2013-results-index
We use the term information spillover (as opposed to contagion or interdependence) to refer to the impact of the events on competing banks that do not impact the broader financial markets in general.
The market share in a foreign exchange is relatively low for the banks that the Euromoney FX survey identifies. Of the 50 banks listed in the 2013 survey, only 16 banks had a share greater than or equal to 1%. This group includes the seven settlement banks. Thus, the 1% threshold is appropriate as an indicator of a significant foreign exchange market share
The seven settlement banks are assigned to the following buckets: HSBC Holdings and JP Morgan Chase are assigned to bucket 4, Citigroup and Barclays to bucket 3, Bank of America and Royal Bank of Scotland to bucket 2, and Union Bank of Switzerland to bucket 1.
To the extent that the loan-to-asset ratio and the deposit ratio are indicators of opacity, an alternative hypothesis is that banks with the higher levels of these ratios are more vulnerable to spillovers (Jones et al. 2012). As the loan-to-assets ratio increases, the opacity of the bank increases since the borrowers are less well known to market participants. This opacity can create a stronger reaction to the events. Morgan (2002) finds that increased holdings of cash and deposits increase the likelihood for disagreement among bond rating agencies, possibly because of agency problems.
The 2003 Basel Committee report provided the details on the following website: http://www.bis.org/publ/bcbs96.pdf
Although the Basel Committee published guidelines on measurement approaches in 2011, there is still no consensus in the literature. Please see: https://www.bis.org/publ/bcbs196.htm
Several banks sold payment protection insurance inappropriately from 1990 till 2010. The redress cost alone is expected to be around 45 billion British pounds. Please see: https://www.ft.com/content/ebb83a38-f7fa-11e5-96db-fc683b5e52db
The US Commodity Futures Trading Commission (CFTC) recognized Union Bank of Switzerland as the first bank to report the misconduct to the CFTC: http://www.cftc.gov/PressRoom/PressReleases/pr7056-14.
The New York Times reported this information on February 10, 2015, in an article entitled “Union Bank of Switzerland Fourth-Quarter Profit up 5% on Lower Legal Costs and a Tax Gain,” by Chad Bray.
Please see the following article for the details: https://uk.reuters.com/article/uk-banks-forex-settlement-barclays/barclays-fined-2-4-billion-for-fx-manipulation-to-fire-eight-staff-idUKKBN0O51QX20150521
References
Aime F, Johnson S, Ridge JW, Hill AD (2010) The routine may be stable, but the advantage is not: competitive implications of key employee mobility. Strateg Manag J 31:75–87
Beltratti A, Stulz RM (2012) The credit crisis around the globe: why did some banks perform better? J Financ Econ 105:1–17
Bessler W, Nohel T (2000) Asymmetric information, dividend reductions, and contagion effects in bank stock returns. J Bank Financ 24:1831–1848
Bollerslev T (1986) Generalized autoregressive conditional heteroscedasticity. J Econ 31:307–327
Calomiris CW, Mason JR (1997) Contagion and bank failures during the great depression: the June 1932 Chicago banking panic. Am Econ Rev 87:863–883
Carow KA (2001) Citicorp-travelers group merger: challenging barriers between banking and insurance. J Bank Financ 25:1553–1571
Champagne C, Kryzanowski L (2007) Are current syndicated loan alliances related to past alliances? J Bank Financ 31:3145–3161
Cummins JD, Lewis CM, Wei R (2006) The market value impact of operational loss events for US banks and insurers. J Bank Financ 30:2605–2634
De Bruyckere V, Gerhardt M, Schepens G, Vander Vennet R (2013) Bank/sovereign risk spillovers in the European debt crisis. J Bank Financ 37:4703–4809
Docking DS, Hirschey M, Jones E (1997) Information and contagion effects of bank loan loss reserve announcements. J Financ Econ 43:219–239
Engle RF (1982) Autoregressive condition heteroscedasticity with estimates of the variance of United Kingdom inflation. Econometrica 50:987–1007
Gandhi P, Lustig H (2015) Size anomalies in U.S banks tock returns. J Financ 70:733–768
Gillet R, Hubner G, Plunus S (2010) Operational risk and reputation in the financial industry. J Bank Financ 34:224–235
Goldman E, Peyer U, Stefanescu I (2012) Financial misrepresentation and its impact on rivals. Financ Manag 41:915–945
Goldsmith-Pinkham P, Yorulmazer T (2010) Liquidity, bank runs, and bailouts: spillover effects during the northern rock episode. J Financ Serv Res 37:83–98
Hayo B, Kutan AM (2005) IMF-related news and emerging financial markets. J Int Money Financ 24:1126–1142
Jordan JS, Peek J, Rosengren ES (2000) The market reaction to the disclosure of supervisory actions: implications for bank transparency. J Financ Intermed 9:298–319
Jones JS, Lee WY, Yeager TJ (2012) Opaque banks, price discovery, and financial instability. J Financ Intermed 21:383–408
Karpoff J, Lee DS, Martin GS (2008) The cost to firms of cooking the books. J Financ Quant Anal 43:581–612
Kutan AM, Aksoy T (2003) Public information arrival and the fisher effect in emerging markets: evidence from stock and bond markets in Turkey. J Financ Serv Res 23:225–239
Koster H, Pelster M (2017) Financial penalties and bank performance. J Bank Financ 79:57–73
Madura J, McDaniel WR (1989) Market reaction to increased loan loss reserves at money-center banks. J Financ Serv Res 3:359–369
Madura J, Whyte A, McDaniel WR (1991) Reaction of British bank share prices to Citicorp's announced $3 billion increase in loan-loss reserves. J Bank Financ 15:151–163
Morgan DP (2002) Rating banks: risk and uncertainty in an opaque industry. Am Econ Rev 92:874–888
Palmrose Z, Richardson V, Scholz S (2004) Determinants of market reactions to restatement announcements. J Account Econ 37:59–89
Paruchuri S, Misangyi VF (2015) Investor perceptions of financial misconduct: the heterogeneous contamination of bystander firms. Acad Manag J 58:169–194
Reichert AK, Lockett M, Rao RP (1996) The impact of illegal business practice on shareholder returns. Financ Rev 31:67–85
Slovin M, Sushka M, Poloncheck J (1999) An analysis of contagion and competitive effects at commercial banks. J Financ Econ 54:197–225
Smirlock M, Kaufold H (1987) Bank foreign lending, mandatory disclosure rules, and the reaction of bank stock prices to the Mexican debt crisis, J Bus 60:347–364
Tonkiss F (2009) Trust, confidence and economic crisis. Intereconomics 44:196–202
Acknowledgments
We thank the editor (Warren Bailey), an anonymous referee, Jeff Madura, James E. McNulty, and James Thomson for excellent comments that substantially improved this paper. The usual disclaimer applies.
Author information
Authors and Affiliations
Corresponding author
Appendix 1 List of sample banks
Appendix 1 List of sample banks
This appendix shows the key characteristics of the sample banks. Panel A shows the settlement banks, Panel B shows the non-settlement systemically important banks, and Panel C shows the non-settlement banks that are not systemically important. The Top loss absorbency t banks must keep a loss absorbency level greater than or equal to 1.5%, and Top foreign exchange share banks have more than a 1% share of the foreign exchange market. The appendix also shows the geographical region of the banks’ headquarters such as the US, Europe, Asia-Pacific (Asia and Australia), and Other (primarily Canada and Latin America).
No. | Bank Name | Top foreign exchange share | Systemically important bank | Top loss absorbency | US | Europe | Asia | Other |
|---|---|---|---|---|---|---|---|---|
Panel A. Settlement banks | ||||||||
1 | HSBC Holdings | X | X | X | – | X | – | – |
2 | JP Morgan Chase | X | X | X | X | – | – | – |
3 | Citigroup Inc. | X | X | X | X | – | – | – |
4 | Bank Of America Corp | X | X | X | X | – | – | – |
5 | The Royal Bank of Scotland | X | X | X | – | X | – | – |
6 | Union Bank of Switzerland | X | X | – | – | X | – | – |
7 | Barclays | X | X | X | – | X | – | – |
TOTAL | 7 | 7 | 6 | 3 | 4 | 0 | 0 | |
Panel B. Non-settlement, systemically important banks | ||||||||
1 | BNP Paribas | X | X | X | – | X | – | – |
2 | Deutsche Bank | X | X | X | – | X | – | – |
3 | Credit Suisse Group AG | X | X | X | – | X | – | – |
4 | Goldman Sachs | X | X | X | X | – | – | – |
5 | Mitsubishi UFJ Financial Group | – | X | X | – | – | X | – |
6 | Morgan Stanley | X | X | X | X | – | – | – |
7 | Agricultural Bank of China | – | X | – | – | – | X | – |
8 | Bank of China Limited | – | X | – | – | – | X | – |
9 | The Bank of New York Mellon | – | X | – | X | – | – | – |
10 | Banco Bilbao Vizcaya Argentaria | – | X | – | – | X | – | – |
11 | Industrial & Coml. Bk of China | – | X | – | – | – | X | – |
12 | ING Group | – | X | – | – | X | – | – |
13 | Mizuho Financial Group | – | X | – | – | – | X | – |
14 | Nordea Bank | – | X | – | – | X | – | – |
15 | Banco Santander | – | X | – | – | X | – | – |
16 | Societe Generale Group | X | X | – | – | X | – | – |
17 | Standard Chartered | – | X | – | – | X | – | – |
18 | State Street Corporation | X | X | – | X | – | – | – |
19 | Sumitomo Mitsui Financial Gp | – | X | – | – | – | X | – |
20 | UniCredit Group | – | X | – | – | X | – | – |
21 | Wells Fargo & Company | – | X | – | X | – | – | – |
TOTAL | 7 | 21 | 6 | 5 | 10 | 6 | 0 | |
Panel C: Non-settlement, non-systemically important banks | ||||||||
1 | BBVA Banco Francés S.A. | – | – | – | – | – | – | X |
2 | Banco Macro S.A. | – | – | – | – | – | – | X |
3 | Banco Santander Rio S.A. | – | – | – | – | – | – | X |
4 | Galicia Financial Group | – | – | – | – | – | – | X |
5 | The ANZ Banking Group | – | – | – | – | – | X | – |
6 | National Australia Bank Limited | – | – | – | – | – | X | – |
7 | Bank Zachodni WBK | – | – | – | – | X | – | – |
8 | Credicorp Ltd. | – | – | – | – | – | – | X |
9 | Banco Bradesco | – | – | – | – | – | – | X |
10 | Banco Santander Brasil | – | – | – | – | – | – | X |
11 | Itaú Unibanco | – | – | – | – | – | – | X |
12 | The Bank of Montreal | – | – | – | – | – | – | X |
13 | The Bank of Nova Scotia | – | – | – | – | – | – | X |
14 | Canadian Impl. Bk. of Commerce | – | – | – | – | – | – | X |
15 | HSBC Holdings Bank Canada | – | – | – | – | – | – | X |
16 | National Bank of Canada | – | – | – | – | – | – | X |
17 | The Royal Bank of Canada | – | – | – | – | – | – | X |
18 | The Toronto-Dominion Bank | – | – | – | – | – | – | X |
19 | Banco Bilbao Vizcaya Argentaria | – | – | – | – | X | – | – |
20 | CorpBanca | – | – | – | – | – | X | – |
21 | Banco de Chile | – | – | – | – | – | – | X |
22 | Banco Santander-Chile | – | – | – | – | – | – | X |
23 | Grupo Aval Acciones Y Valores, | – | – | – | – | – | – | X |
24 | Bancolombia | – | – | – | – | – | – | X |
25 | Danske Bank | – | – | – | – | X | – | – |
26 | Lloyds Banking Group | – | – | – | – | X | – | – |
27 | The Royal Bank of Scotland | – | – | – | – | X | – | – |
28 | National Bank of Greece | – | – | – | – | X | – | – |
29 | HDFC Bank | – | – | – | – | – | X | – |
30 | ICICI Bank | – | – | – | – | – | X | – |
31 | Allied Irish Banks | – | – | – | – | – | X | – |
32 | The Bank of Ireland | – | – | – | – | X | – | – |
33 | KB Financial Group | – | – | – | – | – | X | – |
34 | Shinhan Financial Group | – | – | – | – | – | X | – |
35 | Espirito Santo Financial Group | – | – | – | – | X | – | – |
36 | Grupo Financiero Santander | – | – | – | – | – | – | X |
37 | Banco Latinoamericano de Comercio Exterior, S.A | – | – | – | – | – | – | X |
38 | DBS Group Holdings Ltd | – | – | – | – | – | X | – |
39 | United Overseas Bank Limited | – | – | – | – | – | X | – |
40 | Swedbank AB | – | – | – | – | X | – | – |
TOTAL | 0 | 0 | 0 | 0 | 9 | 10 | 21 | |
Rights and permissions
About this article
Cite this article
Akhigbe, A., Balasubramnian, B. & Whyte, A.M. Foreign Exchange Manipulation and the Equity Returns of Global Banks. J Financ Serv Res 57, 207–230 (2020). https://doi.org/10.1007/s10693-018-0301-1
Received:
Revised:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10693-018-0301-1
Keywords
- Foreign exchange manipulation
- Systemically important banks
- Reputational penalty
- Information spillover effects
- Competitive effects
- Operational risk