Bank Credit Risk Events and Peers’ Equity Value

  1. Ana-Maria Fuertes 1
  2. Maria-Dolores Robles 2
  1. 1 Professor of Finance and Econometrics, Cass Business School, City, University of London, ECIY
  2. 2 Associate Professor of Finance and Econometrics, Universidad Complutense de Madrid (UCM)
Revista:
Documentos de Trabajo (ICAE)

ISSN: 2341-2356

Año de publicación: 2021

Número: 6

Páginas: 1-62

Tipo: Documento de Trabajo

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Otras publicaciones en: Documentos de Trabajo (ICAE)

Resumen

This paper documents a negative cross-transmission of bank-idiosyncratic credit risk events to the equity value of peers comprising other banks, insurance and real estate firms inter alia. Large jumps in the idiosyncratic component of bank CDS spreads significantly reduce the equity value of peers, particularly on the event day. The negative externality does not hinge on the “information connectedness” between the two entities as proxied by characteristics such as common core line of business, common country or region, and inter-country common legal tradition. The negative externality is stronger in turmoil market conditions when risk-aversion levels are higher and/or investors are subject to pessimism. The more fragile the risk profile of the event bank and peer firm prior to the event the stronger the cross-transmission. The findings lend support to the wake-up call paradigm at micro level, and are insightful towards a better assessment of the vulnerability of the financial system.

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