The determinants and effects of admnistrative sanctions on banks performance: the Italian evidence

The recent financial turmoil has refuelled the debate on the effectiveness of supervision and the overall architecture for the safeguard and stability of the international financial system. From this perspective, the design of the right incentives for a sounder and more prudent management of banks has attracted increasing attention, especially for those who are attempting to identify an effective discipline for bank organizations and their board members. Coherently with the evolution of financial markets and the increase of challenges which supervisory authorities have to face in order to guarantee a more reliable financial system, we move throughout an analysis of the evolution which has been characterizing the supervisory behaviour during last decade, in order to highlight which are the latest objectives supervisors are going to pursue in their undertaking. Thus, in order to investigate the effectiveness of the supervisory enforcements, we take into consideration the role of on-site inspections and sanctions inflicted by supervisory authorities. In particular, coherently with the objective to perform an analysis upon the effectiveness of supervisory action, we research for the determinants and effects of administrative sanctions issued by the Bank of Italy upon the Italian banks during the period from 1998 to 2009, in order to investigate, if any, a relation within the financial performance achieved by those banks before and after the sanction. To perform this analysis, we created a complete dataset including the entirety of administrative sanctions issued by the Bank of Italy during this period, which we matched with the economic performance achieved before and after the sanction by the banks included in our analysis. Because of its relevant conclusions, we consider this paper as particularly relevant for China and other Asian countries, given their developing financial infrastructure and extreme reliance on banks in providing financing to the economy.