Top

Journal of Financial Services Research

Published in:

26-09-2018

Foreign Exchange Manipulation and the Equity Returns of Global Banks

Authors: Aigbe Akhigbe, Bhanu Balasubramnian, Ann Marie Whyte

Published in: Journal of Financial Services Research | Issue 2/2020

Activate our intelligent search to find suitable subject content or patents.

search-config

AI-assisted search

Off

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.

previous article Borrower Opacity and Loan Performance: Evidence from China

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Available only for authorised users

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

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 31:75–87CrossRef

Beltratti A, Stulz RM (2012) The credit crisis around the globe: why did some banks perform better? J Financ Econ 105:1–17CrossRef

Bessler W, Nohel T (2000) Asymmetric information, dividend reductions, and contagion effects in bank stock returns. J Bank Financ 24:1831–1848CrossRef

Bollerslev T (1986) Generalized autoregressive conditional heteroscedasticity. J Econ 31:307–327CrossRef

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 25:1553–1571CrossRef

Champagne C, Kryzanowski L (2007) Are current syndicated loan alliances related to past alliances? J Bank Financ 31:3145–3161CrossRef

Cummins JD, Lewis CM, Wei R (2006) The market value impact of operational loss events for US banks and insurers. J Bank Financ 30:2605–2634CrossRef

De Bruyckere V, Gerhardt M, Schepens G, Vander Vennet R (2013) Bank/sovereign risk spillovers in the European debt crisis. J Bank Financ 37:4703–4809CrossRef

Docking DS, Hirschey M, Jones E (1997) Information and contagion effects of bank loan loss reserve announcements. J Financ Econ 43:219–239CrossRef

Engle RF (1982) Autoregressive condition heteroscedasticity with estimates of the variance of United Kingdom inflation. Econometrica 50:987–1007CrossRef

Gandhi P, Lustig H (2015) Size anomalies in U.S banks tock returns. J Financ 70:733–768CrossRef

Gillet R, Hubner G, Plunus S (2010) Operational risk and reputation in the financial industry. J Bank Financ 34:224–235CrossRef

Goldman E, Peyer U, Stefanescu I (2012) Financial misrepresentation and its impact on rivals. Financ Manag 41:915–945CrossRef

Goldsmith-Pinkham P, Yorulmazer T (2010) Liquidity, bank runs, and bailouts: spillover effects during the northern rock episode. J Financ Serv Res 37:83–98CrossRef

Hayo B, Kutan AM (2005) IMF-related news and emerging financial markets. J Int Money Financ 24:1126–1142CrossRef

Jordan JS, Peek J, Rosengren ES (2000) The market reaction to the disclosure of supervisory actions: implications for bank transparency. J Financ Intermed 9:298–319CrossRef

Jones JS, Lee WY, Yeager TJ (2012) Opaque banks, price discovery, and financial instability. J Financ Intermed 21:383–408CrossRef

Karpoff J, Lee DS, Martin GS (2008) The cost to firms of cooking the books. J Financ Quant Anal 43:581–612CrossRef

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 23:225–239CrossRef

Koster H, Pelster M (2017) Financial penalties and bank performance. J Bank Financ 79:57–73CrossRef

Madura J, McDaniel WR (1989) Market reaction to increased loan loss reserves at money-center banks. J Financ Serv Res 3:359–369CrossRef

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 15:151–163CrossRef

Morgan DP (2002) Rating banks: risk and uncertainty in an opaque industry. Am Econ Rev 92:874–888CrossRef

Palmrose Z, Richardson V, Scholz S (2004) Determinants of market reactions to restatement announcements. J Account Econ 37:59–89CrossRef

Paruchuri S, Misangyi VF (2015) Investor perceptions of financial misconduct: the heterogeneous contamination of bystander firms. Acad Manag J 58:169–194CrossRef

Reichert AK, Lockett M, Rao RP (1996) The impact of illegal business practice on shareholder returns. Financ Rev 31:67–85CrossRef

Slovin M, Sushka M, Poloncheck J (1999) An analysis of contagion and competitive effects at commercial banks. J Financ Econ 54:197–225CrossRef

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 44:196–202CrossRef

Title: Foreign Exchange Manipulation and the Equity Returns of Global Banks
Authors: Aigbe Akhigbe
Bhanu Balasubramnian
Ann Marie Whyte
Publication date: 26-09-2018
Publisher: Springer US
Published in: Journal of Financial Services Research / Issue 2/2020
Print ISSN: 0920-8550
Electronic ISSN: 1573-0735
DOI: https://doi.org/10.1007/s10693-018-0301-1