On Becoming an O-SII ('Other Systemically Important Institution')

Abstract

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.

The COVID-19 Pandemic and Sovereign Bond Risk

“…In order to quantify the impact of the pandemic risk on sovereign CDS spreads, we apply the event study technique (see MacKinlay, 1997 for details). 4 To compute the expected or normal change, we follow previous studies (see, e.g., Andries, Nistor, Ongena, & Sprincean, 2020;Binici, Hutchison, & Miao, 2020;Drago & Gallo, 2016;Sahin & de Haan, 2016;Micu et al, 2006) and employ the market model as our main estimation model. 5 One of the main advantage of the market model used in our study is that it takes into account market-wide systematic factors that could influence all CDS spreads simultaneously (Micu et al, 2006;Drago and Gallo, 2016).…”

“…Second, we examine what factors drive the abnormal performance of sovereign CDS besides the event per se using a similar approach to Andries, Nistor, Ongena, & Sprincean (2020). The factors we study are pandemic-related (Daehler et al, 2020;Cevik and Öztürkkal, 2020) and other local, regional and global factors that are found to be connected with sovereign spreads (e.g., Hilscher and Nosbusch, 2010;Galariotis et al, 2016;Cepni et al, 2017;Augustin, 2018;Chen and Chen, 2018;Augustin et al, 2021).…”

The COVID-19 Pandemic and Sovereign Bond Risk

“…Second, we examine what factors drive the abnormal performance of sovereign CDS besides the event per se using a similar approach to Andries, Nistor, Ongena, & Sprincean (2020) . The factors we study are pandemic-related ( Daehler et al, 2020 , Cevik and Öztürkkal, 2020 ) and other local, regional and global factors that are found to be connected with sovereign spreads (e.g., Hilscher and Nosbusch, 2010 , Galariotis et al, 2016 , Cepni et al, 2017 , Augustin, 2018 , Chen and Chen, 2018 , Augustin et al, 2021 ).…”

Market reaction to supranational banking supervision in Europe: Do firm- and country-specific factors matter?

“…Much of the credibility of the SSM is due to the design of ex ante and ex post controls on the NCAs in order to ensure a degree of consistency in supervision, given that the ECB is solely responsible for the efficient functioning of the mechanism. These controls may be understood, within the context of agency theory, as a principal-agent structure 5 . The ECB may be considered as the principal that adopts a series of controls to ensure that its objectives regarding prudential supervision policies are carried out by the NCAs, reducing potential moral hazard problems (Elgie, 2002;Boone and Johnson, 2011;Gren et al, 2015;Carletti et al, 2016).…”

“…An interesting discussion about this issue can be found in the paper by Allen et al (2015)5 The principal-agent approach has been used by some authors(Pollack, 2003;Tallberg, 2003;Thatcher, 2011) to …”