When LIBOR becomes LIEBOR: Reputational Penalties and Bank Contagion

The Financial Review, forthcoming

44 Pages Posted: 23 May 2018 Last revised: 8 Jul 2020

See all articles by Michele Fabrizi

Michele Fabrizi

University of Padova

Xing Huan

University of Warwick - Accounting Group

Antonio Parbonetti

University of Padua

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

Fabrizi, Michele and Huan, Xing and Parbonetti, Antonio, When LIBOR becomes LIEBOR: Reputational Penalties and Bank Contagion (July 13, 2020). The Financial Review, forthcoming, Available at SSRN: https://ssrn.com/abstract=3176745 or http://dx.doi.org/10.2139/ssrn.3176745

Michele Fabrizi

University of Padova ( email )

Via del Santo, 33
Padova, Padova 35123
Italy

Xing Huan (Contact Author)

University of Warwick - Accounting Group ( email )

Warwick Business School
Coventry CV4 7AL
United Kingdom

Antonio Parbonetti

University of Padua ( email )

Via del Santo 33
Padova, 35123
Italy
+39 049 8274261 (Phone)

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