Large EU banks’ capital and liquidity: Relationship and impact on credit default swap spreads

Sclip, Alex; Girardone, Claudia; Miani, Stefano

doi:10.1016/j.bar.2018.10.001

Cited by 10 publications

(7 citation statements)

References 55 publications

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“…Therefore, European policymakers should develop a coherent strategy with the aim of limiting these risks, which involves clear objectives and a rapid implementation timeline. Carboni et al, 2017;Sclip et al, 2019). These papers do not use stock futures data.…”

Section: Discussionmentioning

confidence: 99%

“…Daily CDS quotes on senior 5-year debt contracts (with a modified-modified restructuring clause) are employed, because these are the most liquid and are widely adopted in the academic literature (e.g. Horváth and Huizinga, 2015;Schäfer et al, 2016;Sclip et al, 2019). For the stock and stock futures markets, daily closing prices are used.…”

Section: Sample Selectionmentioning

confidence: 99%

“…In relation to the CDS market, the core function of bank capital in absorbing unexpected losses and preventing potential insolvency should be of primary importance. Well-capitalized banks, with their associated lower probability of default, are expected to demonstrate less evidence of abnormal CDS reactions than those which are less capitalized (Chiaramonte and Casu, 2013;Sclip et al, 2019). Moreover, under-capitalized institutions might have more incentives to adopt excess risk-taking behaviour (Acharya and Steffen, 2015).…”

Section: Can Bank-specific Features Influence Financial Markets' Reacmentioning

confidence: 99%

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Market reactions to the implementation of the Banking Union in Europe

Pancotto

Gwilym

Williams

2019

The European Journal of Finance

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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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Section: Discussionmentioning

confidence: 99%

Section: Sample Selectionmentioning

confidence: 99%

Section: Can Bank-specific Features Influence Financial Markets' Reacmentioning

confidence: 99%

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Market reactions to the implementation of the Banking Union in Europe

Pancotto

Gwilym

Williams

2019

The European Journal of Finance

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“…However, the existing literature on the causal relationship between capital and liquidity raises concerns regarding serial correlation and endogeneity. To address these issues, I adopt the generalized method of moments (GMM) simultaneous equations model, following the approach of Distinguin et al (2013) and Sclip et al (2019). GMM is preferred over 2SLS (two-stage least squares) regression as it considers error heteroskedasticity and is robust to error distribution (Distinguin et al , 2013; Hall, 2005).…”

Section: Methodsmentioning

confidence: 99%

Liquidity, interbank network topology and bank capital

Ardekani

2023

RAF

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Purpose While previous literature has emphasized the causal relationship from liquidity to capital, the impact of interbank network characteristics on this relationship remains unclear. By applying the interbank network simulation, this paper aims to examine whether the causal relationship between capital and liquidity is influenced by bank positions in the interbank network. Design/methodology/approach Using the sample of 506 commercial banks established in 28 European countries from 2001 to 2013, the author adopts the generalized method of moments simultaneous equations approach to investigate whether interbank network characteristics influence the causal relationship between bank capital and liquidity. Findings Drawing on a sample of commercial banks from 28 European countries, this study suggests that the interconnectedness of banks within interbank loan and deposit networks shapes their decisions to establish higher or lower regulatory capital ratios in the face of increased illiquidity. These findings support the implementation of minimum liquidity ratios alongside capital ratios, as advocated by the Basel Committee on Banking Regulation and Supervision. In addition, the paper underscores the importance of regulatory authorities considering the network characteristics of banks in their oversight and decision-making processes. Originality/value This paper makes a valuable contribution to the current body of research by examining the influence of interbank network characteristics on the relationship between a bank’s capital and liquidity. The findings provide insights that add to the ongoing discourse on regulatory frameworks and emphasize the necessity of customized approaches that consider the varied interbank network positions of banks.

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“…B accounts for market-wide factors, such as general business climate changes (e.g. Sclip et al, 2019), aggregate volatility (e.g. Annaert et al, 2013) and market-wide variations in CDS spreads (e.g.…”

Section: Methodsmentioning

confidence: 99%

The European Bank Recovery and Resolution Directive: A market assessment

Pancotto

Gwilym

Williams

2019

Journal of Financial Stability

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This paper provides evidence of the impact of the new European bank resolution regime on the sovereign-bank nexus. The implementation of the Bank Recovery and Resolution Directive (BRRD) is considered as an exogenous shock which provides the setting for a natural experiment. This investigation tests the financial markets' perception of the effectiveness of the new rules in weakening the tight interconnectedness between sovereign and bank risk. A Difference-in-Differences (DiD) approach is adopted, building evidence from the Credit Default Swap (CDS) market for banks and nonfinancial corporates over the period 2011-18. The main findings do not indicate a significant weakening in the interaction between bank and sovereign CDS spreads, compared to the corresponding evidence for the non-financial corporate sector. An overall narrowing of the gap between bank and sovereign risk occurs, which initially implies a lack of credibility of the BRRD in financial markets. However, substantial cross-country variations are identified, particularly for Italy and non-euro area countries. These insights make a significant contribution to the policy debate on effective regulation of the sovereign-bank nexus, in the light of recent developments in the EU postcrisis reform agenda.

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Large EU banks’ capital and liquidity: Relationship and impact on credit default swap spreads

Cited by 10 publications

References 55 publications

Market reactions to the implementation of the Banking Union in Europe

Market reactions to the implementation of the Banking Union in Europe

Liquidity, interbank network topology and bank capital

The European Bank Recovery and Resolution Directive: A market assessment

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