How have financial markets reacted to the disclosure of the list of Other Systemically Important Institutions by the European Banking Authority? With an event study of bank stock prices, we document that the immediate reaction of the stock market is negative, suggesting that the included financial institutions are perceived to be less profitable because they are subject to tighter regulation. However, within a few days, investors change their perception in the case of both eurozone and noneuro-zone banks, which can be attributed to their too-big-to-fail status. CDS spreads react similarly, increasing first before decreasing almost immediately thereafter. On the day of the event, abnormal returns are more negative for banks selected using supervisory judgement and for large banks. In the long run, the market reacts more positively in the case of financial institutions selected using discretionary information and those with a lower capitalization.
Using an international sample of 95 banks from 21 European and North American countries spanning from 2008 to 2014, this paper assesses the effectiveness of a large set of general and housing macro-prudential policies in controlling banks' systemic importance and risk-taking incentives. Empirical findings indicate that tightening the general capital requirements, sector specific capital buffers, along with housing countercyclical capital requirements and Debt-Service-to-Income lending criteria significantly reduce banks' contribution to systemic risk and their individual risk-taking. A similar effect has been obtained for loosening real estate loans loss provisioning. Furthermore, the nexus between macroprudential policies and banks' risk is shaped through several channels like bank size, the share of foreign bank assets, banking sector competition and the independence of supervisory authority.
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