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Investor Information and Bank Instability During the Euro Crisis
Author:
Silvia Iorgova
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Series:
IMF Working Papers
Volume/Issue:
Volume 2021: Issue 005
Language:
English
Publication Date:
08 Jan 2021
DOI:
https://doi.org/10.5089/9781513566412.001
ISBN:
9781513566412
ISSN:
1018-5941
Pages:
42
Keywords:
information production; safe asset; WP; reference securities; information-production ratio; banking system; debt crisis; rate of change; reference security model; unsecured debt
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund