The spillover effect of enforcement actions on bank risk-taking

Enforcement actions (sanctions) aim to penalize guilty companies and provide examples to other companies that bad behavior will be penalized. A handful of papers analyze the consequences of sanctions in banking for sanctioned companies, while no papers have investigated the spillover effects on non sanctioned banks. Focusing on credit-related sanctions, we show the existence of a spillover effect: non sanctioned banks behave similar to sanctioned banks, depending on their degree of similarity, offloading problematic loans and reducing their lending activity.