Market reactions to the implementation of the Banking Union in Europe

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Market reactions to the implementation of the Banking Union in Europe. / Pancotto, Livia; ap Gwilym, Owain; Williams, Jonathan.

In: European Journal of Finance, Vol. 26, No. 7-8, 23.05.2020, p. 640-665.

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Pancotto, Livia ; ap Gwilym, Owain ; Williams, Jonathan. / Market reactions to the implementation of the Banking Union in Europe. In: European Journal of Finance. 2020 ; Vol. 26, No. 7-8. pp. 640-665.

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TY - JOUR

T1 - Market reactions to the implementation of the Banking Union in Europe

AU - Pancotto, Livia

AU - ap Gwilym, Owain

AU - Williams, Jonathan

PY - 2020/5/23

Y1 - 2020/5/23

N2 - How did announcements about the implementation of the Banking Union (BU) in Europe impact on financial markets? This paper investigates the effect of the overall bank regulatory reform, considering each associated individual announcement, on Credit Default Swaps (CDS), bank stocks and stock futures during 2012-14. Announcements related to the implementation of the supervisory mechanism, as well as those on the new resolution framework, led to a surge in bank CDS spreads, while having a detrimental effect on the wealth of banks’ shareholders. The CDS market response to sub-events associated with the ECB’s 2014 Comprehensive Assessment (CA) was positive and reflected in a decrease in bank CDS spreads. Furthermore, CDS of Global Systemically Important Banks (G-SIBs) demonstrated a significant reaction to the implementation steps in the BU. Banks’ stock prices reacted in a consistent manner with the CDS market. The stock futures market did not reveal any strong reaction to the changes in the European regulatory landscape. Cross-sectional analysis reveals that bank capitalization is positively associated with responses of G-SIBs’ CDS spreads, but is inversely related to responses of CDS spreads for other bank groups. Weak underlying credit quality is also a relevant factor in explaining abnormal increases in quoted CDS spreads. For the stock market, positive associations of the cumulative abnormal returns (CARs) with capital levels and with the business model orientation are revealed.

AB - How did announcements about the implementation of the Banking Union (BU) in Europe impact on financial markets? This paper investigates the effect of the overall bank regulatory reform, considering each associated individual announcement, on Credit Default Swaps (CDS), bank stocks and stock futures during 2012-14. Announcements related to the implementation of the supervisory mechanism, as well as those on the new resolution framework, led to a surge in bank CDS spreads, while having a detrimental effect on the wealth of banks’ shareholders. The CDS market response to sub-events associated with the ECB’s 2014 Comprehensive Assessment (CA) was positive and reflected in a decrease in bank CDS spreads. Furthermore, CDS of Global Systemically Important Banks (G-SIBs) demonstrated a significant reaction to the implementation steps in the BU. Banks’ stock prices reacted in a consistent manner with the CDS market. The stock futures market did not reveal any strong reaction to the changes in the European regulatory landscape. Cross-sectional analysis reveals that bank capitalization is positively associated with responses of G-SIBs’ CDS spreads, but is inversely related to responses of CDS spreads for other bank groups. Weak underlying credit quality is also a relevant factor in explaining abnormal increases in quoted CDS spreads. For the stock market, positive associations of the cumulative abnormal returns (CARs) with capital levels and with the business model orientation are revealed.

KW - CDS

KW - European Banking Union

KW - regulatory reform

KW - stock futures market

KW - stock market

U2 - 10.1080/1351847X.2019.1661264

DO - 10.1080/1351847X.2019.1661264

M3 - Article

VL - 26

SP - 640

EP - 665

JO - European Journal of Finance

JF - European Journal of Finance

SN - 1351-847X

IS - 7-8

ER -