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Market reactions to the implementation of the Banking Union in Europe

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  • Livia Pancotto
  • Owain ap Gwilym
  • Jonathan Williams

Abstract

How did announcements about the implementation of the Banking Union (BU) in Europe impact on financial markets? This paper investigates the effect of the overall bank regulatory reform, considering each associated individual announcement, on Credit Default Swaps (CDS), bank stocks and stock futures during 2012–14. Announcements related to the implementation of the supervisory mechanism, as well as those on the new resolution framework, led to a surge in bank CDS spreads, while having a detrimental effect on the wealth of banks’ shareholders. The CDS market response to sub-events associated with the ECB’s 2014 Comprehensive Assessment (CA) was positive and reflected in a decrease in bank CDS spreads. Furthermore, CDS of Global Systemically Important Banks (G-SIBs) demonstrated a significant reaction to the implementation steps in the BU. Banks’ stock prices reacted in a consistent manner with the CDS market. The stock futures market did not reveal any strong reaction to the changes in the European regulatory landscape. Cross-sectional analysis reveals that bank capitalization is positively associated with responses of G-SIBs’ CDS spreads, but is inversely related to responses of CDS spreads for other bank groups. Weak underlying credit quality is also a relevant factor in explaining abnormal increases in CDS spreads. For the stock market, positive associations of the cumulative abnormal returns (CARs) with capital levels and with the business model orientation are revealed.

Suggested Citation

  • Livia Pancotto & Owain ap Gwilym & Jonathan Williams, 2020. "Market reactions to the implementation of the Banking Union in Europe," The European Journal of Finance, Taylor & Francis Journals, vol. 26(7-8), pages 640-665, May.
    • Handle: RePEc:taf:eurjfi:v:26:y:2020:i:7-8:p:640-665
    DOI: 10.1080/1351847X.2019.1661264
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    Cited by:

    1. Pancotto, Livia & ap Gwilym, Owain & Molyneux, Philip, 2023. "Deal! Market reactions to the agreement on the EU Covid-19 recovery fund," Journal of Financial Stability, Elsevier, vol. 67(C).
    2. Cerasi, Vittoria & Galfrascoli, Paola, 2023. "Bail-in and bank funding costs," Journal of International Money and Finance, Elsevier, vol. 137(C).
    3. Ferretti, Riccardo & Venturelli, Valeria & Azzaretto, Alessandro, 2023. "Does individual SREP results reveal real news?," Finance Research Letters, Elsevier, vol. 57(C).
    4. Haufler, Andreas, 2021. "Regulatory and bailout decisions in a banking union," Journal of Banking & Finance, Elsevier, vol. 133(C).

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