Investor Information and Bank Instability During the Euro Crisis

Investor Information and Bank Instability During the Euro Crisis
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Volume/Issue: Volume 2021 Issue 005
Publication date: January 2021
ISBN: 9781513566412
$18.00
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Topics covered in this book

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Investments and Securities-General , Economics- Macroeconomics , Money and Monetary Policy , information production , safe asset , WP , reference securities , information-production ratio , banking system , debt crisis , rate of change , reference security model , unsecured debt

Summary

Outside of financial crises, investors have little incentive to produce private information on banks’ short-term liabilities held as information-insensitive safe assets. The same does not hold true during crises. We measure daily information production using data from credit default swap spreads during the global financial crisis and the subsequent European debt crisis. We study abnormal information production around major events and interventions during these crises and find that, on average, capital injections reduced abnormal information production while early European stress tests increased it. We also link information production to outcomes: high levels of information production predict bank balance sheet contraction and higher government expenditures to support financial institutions. In an addendum, we show information production on nonfinancials dramatically increased relative to financials at the height of the COVID-19 crisis, reflecting the nonfinancial nature of the initial shock.