Download This PaperWhen LIBOR becomes LIEBOR: Reputational Penalties and Bank Contagion
The Financial Review, 2021
44 Pages Posted: 23 May 2018 Last revised: 8 Apr 2021
Date Written: July 13, 2020
Abstract
We study whether commonality of incentives and opportunity to commit fraud triggers reputational contagion from culpable firms to nonculpable firms. Relying on a sample of 30 banks involved in fixing the London Interbank Offered Rate (LIBOR) and a control sample of 30 banks, we find that banks' reputations suffered substantial damage upon the announcement of their involvement in the scandal. We also document reputational contagion spread from banks that manipulated LIBOR to banks that shared the same incentives and opportunity to commit the fraud. The reputational contagion is more pronounced for large derivatives dealers who have had the strongest incentive to commit the fraud.
Keywords: Bank Contagion, Fraud Triangle, Operational Risk, Reputational Penalties
JEL Classification: G14, M41
Suggested Citation: Suggested Citation