Knowledge that Transforms

We examine the impact of the EU Banking Union on the information production of stress tests by exploiting the institutional shift in supervisory responsibility for significant banks to the European Central Bank (ECB) under the Single Supervisory Mechanism (SSM). We hypothesize that a centralized authority with both supervisory and financial stability mandates may reduce the informativeness of stress tests to mitigate negative spillovers, particularly potential threats to financial stability arising from disclosure. Our findings support this hypothesis, showing that the information production from stress tests declined following the introduction of the SSM. This reduction is primarily driven by weakly performing banks. We find no support for alternative explanations such as supervisory leniency, market learning, or the absence of an acute crisis.

This paper examines the Reaching-for-Coupon (RFC) phenomenon in U.S. corporate bond mutual funds. We define RFC as a portfolio tilt toward higher-coupon bonds relative to peers with similar yields. Using detailed bond-level holdings data from 2002–2018, we construct a novel fund-level RFC measure and show that high-RFC funds attract larger inflows, particularly in low-interest-rate environments. Crucially, investor flows into RFC funds are less sensitive to poor performance, leading to a less concave flow–performance relationship and mitigating redemption-driven fragility. These altered flow dynamics strengthen managerial incentives to take risk. Moreover, compared to Reaching-for-Yield (RFY) funds, RFC funds provide more stable income streams and are less exposed to credit downgrades. Our results demonstrate that RFC captures a distinct channel through which income-driven investor demand shapes risk-taking and fragility in bond markets.