ECB Financial Stability Review is published twice a year by ECB in order to attract attention to the potential risks in the Euro area.

In the second financial stability review of this year, the focus was on the implications of bank misconduct costs for bank equity returns and valuations.

Over the last decade, the misconduct by banks has weighed on global bank profitability and equity positions, with the related costs amounting to over USD 350 billion or 15% of total bank equity.

The misconduct costs hit the banks in the U.S. particularly following the global financial crisis. On the other side, European banks have been more exposed since 2015. There are charges related to sub-prime lending; however, misconduct costs occurred as a result of the violations of the sanctions, money laundering and tax evasion are relatively high in recent years. If no misconduct cost was involved for Euro area banks, their net income could have been one-third higher within the same period.

In this review, ECB analyzed the dataset of the misconduct costs in 8 global banks in the euro area and found that expected equity returns are highly affected by the financial penalties.  Also, it appears that the banks in Europe suffered from misconduct costs more than the banks in the U.S. suffered.

ECB stated that the financial penalties caused by misconduct costs had a major impact on the expected equity returns of the banks operating in the euro area. It was also understood that the investors have more concerns about the penalties given within this period.

In the last part of the review, ECB highlighted the importance of Single Supervisory Mechanism to prevent these cases and further reported that fast investigation and closure of misconduct cases could help the prevention of the loss of goodwill issues, at least some part of it, in these banks.


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