Market reactions to the implementation of the Banking Union in Europe

Livia Pancotto, Owain ap Gwilym, Jonathan Williams

Research output: Contribution to journalArticle

Abstract

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.
LanguageEnglish
JournalEuropean Journal of Finance
Publication statusAccepted/In press - 21 Aug 2019

Fingerprint

Market reaction
Banking union
Credit default swap (CDS) spreads
Credit default swaps
Bank credit
Announcement
Business model
Stock prices
Shareholders
Wealth
Cross-sectional analysis
Stock market
Factors
Regulatory reform
Cumulative abnormal return
Futures markets
Market response
Capitalization
Financial markets
Credit

Keywords

  • Banking Union
  • Europe
  • bank regulatory reform

Cite this

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title = "Market reactions to the implementation of the Banking Union in Europe",
abstract = "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.",
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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, 21.08.2019.

Research output: Contribution to journalArticle

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AU - Pancotto, Livia

AU - ap Gwilym, Owain

AU - Williams, Jonathan

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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.

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