"Whatever it takes": an empirical assessment of the value of policy actions in banking

What types of policy intervention had a greater impact during the financial crisis? By using a detailed dataset of worldwide policy, we answer this question focusing on Globally-Systemically Important banks (G-SIBs), looking both to stock returns and Credit Default Swap (CDS) spreads reactions. As robustness checks, we also analyze a control sample of 31 large Non-Financial Companies (NFCs). Overall, we show that different policy interventions from governments and central banks have produced diverse market reactions: investors generally appreciate monetary policy interventions for G-SIBs (but not for NFCs) and do not welcome bank failures and bailouts (for both G-SIBs and NCFs)

The relationship between everyday practices and financial literacy. an empirical analysis

The global financial crisis has drawn the attention of both scholars and supervisors to the issue of financial education as an instrument for the development of efficient markets. The aim of this paper is to test the hypothesis that financial experience, gained with the daily use of different products and services, has a relevant effect on the acquisition of financial capabilities. Data are drawn by the 2008 Bank of Italy Survey on Household Income and Wealth, collecting a wide set of information on respondents and including 9 multiple-choice quizzes to measure financial literacy. A regression model was performed to assess the impact on financial literacy of four different groups of variables: socio-demographic features; income, consumption and household wealth; formal education and the experience resulting from the active participation in the capital market through the holding of financial assets and the use of specific products. The contribution of each group of regressors was measured with the Bonferroni index. Our results are consistent with previous literature, confirming a higher level of financial literacy for middle-aged adults, men, white collars, teachers, officials and managers, increasing with the years of schooling, household income and wealth. As for the financial experience, the Bonferroni index provided a strong evidence of its crucial role in explaining financial literacy, also with respect to a model already accounting for general education. This finding suggests to policymakers the adoption of incentives on the use of financial instruments or wealth accumulation, other than on educational programs

Impact of financial education and transparency on borrowing decisions. the case of consumer credit

Existing studies are not conclusive in favor of a strong relationship between the financial literacy and the ability to take better borrowing decisions. Results are quite heterogeneous and often point out the relevance of other factors, such as socio-demographic features or practical experience gained with daily use of financial products. The impact of (the amount and quality of) information available at the time of consumer choice is still unexplored. The objective of this paper is to fill in this literature gap and explore a large set of possible drivers of borrowing decisions in the consumer finance framework, with a specific focus on the transparency of price conditions. We interviewed a sample of 299 consumers. They were asked to select the best option between five series of credit alternatives. In order to explore the role of transparency, each series of loans was presented with three different sets of information, with an increasing level of detail. The ability to select the best alternative was measured calculating a score based on the Net Present Value criterion, and analysed as the dependent variable of a regression model with demographic, socioeconomic and financial characteristics as predictors. Our findings show that the amount and quality of available information strongly influence the choice. At the same time, an high level of education do not seem to play a significant role. Financial maturity results to positive influence the ability to select the best alternative and employed people perform better than non-working respondents

Impact of financial education and transparency on borrowing decisions. the case of consumer credit

Existing studies are not conclusive in favor of a strong relationship between the financial literacy and the ability to take better borrowing decisions. Results are quite heterogeneous and often point out the relevance of other factors, such as socio-demographic features or practical experience gained with daily use of financial products. The impact of (the amount and quality of) information available at the time of consumer choice is still unexplored. The objective of this paper is to fill in this literature gap and explore a large set of possible drivers of borrowing decisions in the consumer finance framework, with a specific focus on the transparency of price conditions. We interviewed a sample of 299 consumers. They were asked to select the best option between five series of credit alternatives. In order to explore the role of transparency, each series of loans was presented with three different sets of information, with an increasing level of detail. The ability to select the best alternative was measured calculating a score based on the Net Present Value criterion, and analysed as the dependent variable of a regression model with demographic, socioeconomic and financial characteristics as predictors. Our findings show that the amount and quality of available information strongly influence the choice. At the same time, an high level of education do not seem to play a significant role. Financial maturity results to positive influence the ability to select the best alternative and employed people perform better than non-working respondents

The relationship between everyday practices and financial literacy. an empirical analysis

The global financial crisis has drawn the attention of both scholars and supervisors to the issue of financial education as an instrument for the development of efficient markets. The aim of this paper is to test the hypothesis that financial experience, gained with the daily use of different products and services, has a relevant effect on the acquisition of financial capabilities. Data are drawn by the 2008 Bank of Italy Survey on Household Income and Wealth, collecting a wide set of information on respondents and including 9 multiple-choice quizzes to measure financial literacy. A regression model was performed to assess the impact on financial literacy of four different groups of variables: socio-demographic features; income, consumption and household wealth; formal education and the experience resulting from the active participation in the capital market through the holding of financial assets and the use of specific products. The contribution of each group of regressors was measured with the Bonferroni index. Our results are consistent with previous literature, confirming a higher level of financial literacy for middle-aged adults, men, white collars, teachers, officials and managers, increasing with the years of schooling, household income and wealth. As for the financial experience, the Bonferroni index provided a strong evidence of its crucial role in explaining financial literacy, also with respect to a model already accounting for general education. This finding suggests to policymakers the adoption of incentives on the use of financial instruments or wealth accumulation, other than on educational programs

The unintended consequences of the launch of the single supervisory mechanism in Europe

The launch of the Single Supervisory Mechanism (SSM) was an historic event. Beginning in Nov. 2014, the most significant banks came under the direct supervision of the European Central Bank, while national supervisory authorities maintained direct supervision of the remaining banks. Thus, supervision is conducted on two levels, which could cause inconsistency problems. Did the behavior of the significant banks differ from that of the less significant banks during the SSM launch? We find that the significant banks reduced their lending activity more than the less significant banks did in order to shrink their balance sheets and increase their capitalization

Are contingent convertibles going-concern capital?

Contingent convertibles (CoCos) are intended to either convert to new equity or be written down prior to failure while a bank is a going concern. Yet, in the first actual test case, CoCos never converted before its bank failed. We develop a model that predicts that CoCos lead to less (more) extreme stock returns and have yields greater than (similar to) standard subordinated debt yields if investors do (do not) expect them to convert or be written down prior to failure. These predictions are tested using data on CoCos issued by European banks during 2011 to 2017. We find evidence that equity conversion CoCos reduce stock return variance and several other measures of downside risk, consistent with the perception that they are going-concern capital. However, we also provide event study evidence that recent regulatory actions reduced the CoCo – subordinated debt yield spread, which indicates a diminished investor belief that CoCos are going-concern capital

Environmental Engagement and Stock Price Crash Risk: Evidence From the European Banking Industry

This paper investigates the impact of banks’ environmental engagement on their future stock price crash risk. Given the strong commitment of European institutions towards a low carbon economy, we focus on European banks, who are expected to be crucial actors in driving this challenge. Using a sample of 447 bank-year observations across 22 European countries from 2015 to 2021, we find a negative relationship between banks’ environmental engagement and future stock price crash risk, by the signalling theory, suggesting that a high level of environmental engagement corresponds to high ethical standards of bank managers and high levels of financial transparency. ESG, Environmental, Crash risk, Europe, Financial Institutions