Abstract
We analyze link between mortgage-related regulatory penalties levied on banks and the level of systemic risk in the U.S. banking industry. We employ a frequency decomposition of volatility spillovers to draw conclusions about system-wide risk transmission with short-, medium-, and long-term dynamics.
We find that after the possibility of a penalty is first announced to the public, long-term systemic risk among banks tends to increase. In contrast, a settlement with regulatory authorities leads to a decrease in the long-term systemic risk.
Our analysis is relevant both to authorities imposing penalties as well as to those in charge of financial stability.