## Investor Information and Bank Instability During the Euro Crisis

_IMF Working Papers, January 8, 2021_

## Source details

**Canonical URL:** [Investor Information and Bank Instability During the Euro Crisis](https://www.imf.org/en/publications/wp/issues/2021/01/08/investor-information-and-bank-instability-during-the-euro-crisis-49976)

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## Bibliographic details
- Authors: Silvia Iorgova
- Published: January 8, 2021
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513566412.001

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### Summary
- Outside of financial crises, investors have little incentive to produce private information on banks’ short-term liabilities held as information-insensitive safe assets; this changes during crises.
- Daily information production is measured using data from credit default swap spreads during the global financial crisis and the subsequent European debt crisis.
- The study examines abnormal information production around major events and interventions during these crises.
- An addendum shows 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.

### Major findings
- Capital injections, on average, reduced abnormal information production.
- Early European stress tests increased abnormal information production.
- High levels of information production predict:
  - Bank balance sheet contraction.
  - Higher government expenditures to support financial institutions.

### Data, measures, and scope
- Daily information production proxied using credit default swap spreads.
- Crises analyzed:
  - The global financial crisis.
  - The subsequent European debt crisis.
  - Addendum: COVID-19 crisis dynamics comparing nonfinancials and financials.

### Policy implications and interpretation
- Interventions that provide direct capital support (capital injections) can reduce investor incentives to produce destabilizing private information in crisis periods.
- Transparency exercises or early stress tests may increase investor information production and could amplify market scrutiny during fragile periods.
- Elevated investor information production signals the potential for adverse real outcomes (balance sheet contraction) and higher fiscal costs (government support to financial institutions).

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## Content in this bundle

- **Working Paper**
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_Source: https://www.imf.org/en/publications/wp/issues/2021/01/08/investor-information-and-bank-instability-during-the-euro-crisis-49976_