Stock Market Reaction to Regulatory Action in the Continental Illinois Crisis

Swary, Itzhak

doi:10.1086/296347

Cited by 134 publications

(72 citation statements)

References 14 publications

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“…Probably the oldest strand of literature on bank equity "spillovers" applies event study methodology to measure the impacts of specific bank distress or bank failures on other banks' stock prices, see e.g. Swary (1986), Wall and Peterson (1990) or Slovin, Sushka and Polonchek (1999). Other authors applied various regression approaches to link abnormal bank stock returns to asset-side risks, including those related to aggregate shocks, see e.g.…”

Section: Introductionmentioning

confidence: 99%

Tail risk and systemic risk of US and Eurozone financial institutions in the wake of the global financial crisis

Straetmans

Chaudhry

2015

Journal of International Money and Finance

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Abstract. We evaluate multiple market-based measures for US and eurozone individual bank tail risk and banksystemic risk. We apply statistical extreme value analysis to the tails of bank equity capital losses to estimate the likelihood of individual institutions' financial distress as well as individual banks' exposure to each other ("contagion risk") and to global shocks ("extreme systematic" risk). The estimation procedure presupposes that bank equity returns are "heavy tailed" and "tail dependent" as identifying assumption. We also assess to what extent magnitudes of tail risk and systemic risk have been altered by the global financial crisis. Using both US and eurozone banks allows one to make a cross-atlantic comparison of the financial systems' riskiness and financial stability. For Europe we assess the relative importance of cross-border bank spillovers as compared to domestic bank spillovers. The results suggest, inter alia, that both tail risk and systemic risk in the US are higher than in the eurozone. We cannot generally conclude that domestic eurozone spillover risk dominates cross-border eurozone spillover risk. Finally, tail risk and systemic risk have increased over time on both sides of the Atlantic.

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Section: Introductionmentioning

confidence: 99%

Tail risk and systemic risk of US and Eurozone financial institutions in the wake of the global financial crisis

Straetmans

Chaudhry

2015

Journal of International Money and Finance

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“…Swary (1983), Swary (1986) and Pozdena (1991)). Generally, these papers conclude that while there is evidence for contagious effects, they can be largely attributed to fundamentals rather than irrational investor behavior.…”

Section: Literature Reviewmentioning

confidence: 99%

Credit Contagion between Financial Systems

Podlich

Wedow

2011

SSRN Journal

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Abstract:We examine contagion from a number of financial systems to the German financial system using the information content of CDS prices in a GARCH model. After controlling for common factors which may cause comovement in security prices, we find evidence for contagion from the US and European financial systems. Our results additionally confirm that the set up of the financial rescue scheme in Germany partially shielded German banks but not insurance companies from contagion. Overall, our results suggest that contagion from dealer banks have the most prominent effect on the German financial system. While dealer banks impact on German banks and insurance companies in a similar way, a deterioration in the CDS spreads of dealer banks has a particularly pronounced effect on German dealer banks. Keywords:Systemic Risk, CDS Spreads, Contagion, OTC Dealer JEL-Classification: G14, G21, G28 Non-technical summaryThe global financial crises has led to a marked rise in the awareness of the importance of systemic risk. More specifically, the crisis has demonstrated that systemic events can rapidly spill over across borders and to markets, gathering strength and augmenting systemic risk. The vulnerability of financial institutions to contagious effects has placed this issue on top of the agenda of financial stability regulation.In this paper, we examine contagion effects emanating from the financial systems of the US, Europe, Asia-Pacific region and emerging markets to the German financial system using the information content of CDS prices. The structure of OTC markets makes this market and the dealer banks particularly vulnerable to contagion. This is largely due to the high concentration of trading among a few dealers and to the opaqueness of the market. For this reason, we specifically examine the strength of contagion from dealer banks to the German financial system, distinguishing between banks and insurance companies. In addition we explore the magnitude of contagion over time. The relevance of the dynamic nature of contagion was demonstrated during the financial crisis, which started in the US housing market but peaked when a number of individual institutions became distressed. We thus investigate changes in the strength of these financial systems' interdependence. To achieve this we consider, inter alia, the impact of the default of Lehman Brothers and the financial stabilization scheme set up in Germany. To address all these objectives, we use weighted CDS spread indices for each financial system. Our reliance on broad indices allows us to obtain a comprehensive view of the risk to the German financial system. Our findings suggest that there are strong contagious effects from the US and Europe and no effects from the Asia-Pacific region and emerging markets on the the German financial system. While the magnitude of contagion from the US and Europe to the German financial system is comparable, contagion from the US only affects the level of risk in the German financial system, while contagion from the European fina...

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“…Several papers have analyzed the effect of Continental's failure on equity prices of various banks and firms, using event study methodologies. Wall andPeterson (1990) andSwary (1986) both examine the reactions of the equity price of other large US banks, and Jayanti and Whyte (1996) similarly analyze the reactions of foreign bank equity prices. In general, they do not find much evidence that there were increased correlations of equity prices around this time which casts some doubt on the likelihood of contagion risks.…”

Section: Continental For Each Institution That Increased Funding) Nomentioning

confidence: 99%

Can a Bank Run Be Stopped? Government Guarantees and the Run on Continental Illinois

Carlson¹,

Rose²

2016

FEDS

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This paper analyzes the run on Continental Illinois in 1984. We find that the run slowed but did not stop following an extraordinary government intervention, which included the guarantee of all liabilities of the bank and a commitment to provide ongoing liquidity support. Continental's outflows were driven by a broad set of US and foreign financial institutions. These were large, sophisticated creditors with holdings far in excess of the insurance limit. During the initial run, creditors with relatively liquid balance sheets nevertheless withdrew more than other creditors, likely reflecting low tolerance to hold illiquid assets. In addition, smaller and moredistant creditors were more likely to withdraw. In the second and more drawn out phase of the run, institutions with relative large exposures to Continental were more likely to withdraw, reflecting a general unwillingness to have an outsized exposure to a troubled institution even in the absence of credit risk. Finally, we show that the concentration of holdings of Continental's liabilities was a key dynamic in the run and was importantly linked to Continental's systemic importance. January 21, 2016 JEL Classification: G01, G21, H12

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Stock Market Reaction to Regulatory Action in the Continental Illinois Crisis

Cited by 134 publications

References 14 publications

Tail risk and systemic risk of US and Eurozone financial institutions in the wake of the global financial crisis

Tail risk and systemic risk of US and Eurozone financial institutions in the wake of the global financial crisis

Credit Contagion between Financial Systems

Can a Bank Run Be Stopped? Government Guarantees and the Run on Continental Illinois

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