Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/320000 
Year of Publication: 
2017
Series/Report no.: 
CASMEF Working Paper Series No. WP 2017/09
Publisher: 
LUISS Guido Carli, Department of Economics and Finance, Arcelli Centre for Monetary and Financial Studies, Rome
Abstract: 
Disentangling the direct causal effect that sanctions exert on bank performance from the indirect through default risk, we show that a trade-off exists for regulators between banks' performance and stability in Italy. Two key findings provide evidence for the nontriviality of the return-risk nexus: (i) banks' liquidations are concentrated at the lower-end of the profitability distribution, resulting in (attrition) biased estimates; (ii) the drop-out is informative since it depends on the unobserved measurements of profitability. Despite this evidence, while returns are affected by sanctions and regulatory requirements, default risk is not. However, looking at growth of gross loans, enforcement actions reduce default risk though at a cost of a significant fall in lending, creating a regulatory tradeoff. In fact, through loans' growth, we account for the key dynamics of intermediaries' soundness, namely higher profits and less non-performing loans.
Subjects: 
Enforcement Actions
Bank Supervision
Bank Profitability
Bank Default Risk
Liquidity Creation
JEL: 
G18
G21
G28
Document Type: 
Working Paper

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