Unveiling the drivers of banks' misconduct: Sanctions, signals, and the extent of unethical behaviour

This paper seeks to enhance our understanding of the drivers of misconduct in the banking sector. We propose several metrics of misconduct that allow for the identification of the occurrence, number and types of the breaches in the year in which they occur, rather than on the year in which the penalty is paid. Focusing on the US banking industry, our findings have important policy implications. We find that sanctions have a contemporaneous deterrent effect on misconduct. Large sanctions levied on large banks are also found to improve behaviour across the banking industry. The behaviour of larger banks acts as an informational signal for other banks, affecting their probability and intensity of misconduct. • This paper assesses the drivers of banking misconduct by proposing new metrics. • Misconduct is identified with the timely identification of breaches. • Findings reveal sanctions' real-time deterrent effect on misconduct. • Large sanctions on big 5 banks improve industry-wide behaviour.