Social Capital and Bank Misconduct

Abstract

This study uses enforcement actions issued by US bank regulators to show that banks headquartered in counties with higher levels of social capital (as captured by civic norms and social networks) are less likely to be involved in misconduct. This result is mostly significant for less geographically dispersed banks. The results also show that, following misconduct revelation, sanctioned banks experience greater reductions in deposit growth in counties with higher social capital levels, mostly during the last financial crisis and its aftermath. Taken together, these findings indicate that social capital acts as an external monitoring mechanism that prevents and punishes bank misconduct.