Investor Information and Bank Instability During the Euro Crisis

January 8, 2021

Preview Citation

Format: Chicago

Silvia Iorgova, and Chase P. Ross Investor Information and Bank Instability During the Euro Crisis, (USA: International Monetary Fund, 2021) accessed October 6, 2024

Disclaimer: 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.

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.

Subject: Credit default swap, Financial crises, Global financial crisis of 2008-2009, Securities, Stocks

Keywords: Banking system, Debt crisis, Information production, Information-production ratio, Rate of change, Reference securities, Reference security model, Safe asset, Unsecured debt, WP

Publication Details

Pages:

42
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2021/005
Stock No:

WPIEA2021005
ISBN:

9781513566412
ISSN:

1018-5941

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