Reputational Damage of Bank Misconduct: The Role of Regulation and ESG Performance

This study investigates the reputational losses incurred by banks due to detected misconduct and the impact of bank ESG performance on this reputational damage. We use a unique dataset of 400 fines assigned to 39 European listed banks from 2009 to 2022 by US and EU regulatory agencies. Applying the event study methodology, we demonstrate that detected misconduct leads to significant reputational losses. European banks suffer higher reputational penalties when sanctioned by domestic (EU) regulators rather than foreign (US) regulators. Moreover, banks’ global ESG performance significantly mitigates reputational losses resulting from detected misconduct. Among the three sub-pillars of ESG performance, governance performance is shown to be crucial in reducing this reputational damage.