On the informative content of sanctions

Abstract

Abstract This investigation exploits a new database, which merges the balance sheet items of Italian banks with sanctions by Bank of Italy and CONSOB in the last decade. We highlight the informative content of sanctions as key for the success of the supervisory activity. First, we evaluate the effects of sanctions on bank performance: we find a negative impact, more pronounced for those banks that were repeatedly sanctioned, for reasons mainly related to risk assessment and funding strategies. Second, we identify a set of bank ratios related to sanctions: we find a strong predictive power of indicators related to efficiency, productivity, and both funding and asset management. Overall, we show that after the first sanction several banks were not able to correct their strategies to avoid further penalties, because likely they were not provided with enough information on the motivations behind sanctions, hence on the required adjustments.