<div> What is the impact on the cost of bank credit of local corporate environmental and biodiversity exposure? At loan origination, banks charge higher rates to firms creating more environmental damage, especially when they are lowly capitalized, and when the firms operate in “greener” states with lower climate denial and more negative environmental news. Biodiversity risk is also priced, especially when public interest in it intensifies. Following the Trump withdrawal from Paris, banks modulate their environmental risk pricing in “browner” states. In sum, environmental risk pricing in bank lending is also driven by local beliefs and attitudes. </div>

The recent credit crisis and the increased internationalization of the European banks have given the debate about the role of national regulators a renewed urgency. We therefore investigate the determinants of bondholders’ abnormal returns for both domestic and cross-border bank merger announcements that involve European acquirers for the period 1998–2002. We find that bondholders’ abnormal returns are higher for Domestic Mergers than cross-border mergers, in direct contrast to evidence from equity prices where no difference is found. Further investigations in which we control for the changes in market power for example suggest this result may be indicative of investors perceiving Domestic Mergers as increasing the probability of a government bailout in case of distress. Banks’ bondholders also experience higher abnormal returns when the country of the partner bank has stricter rules in relation to forbearance of prudential regulations than the own country, and when functional diversification between lending and fee/trading activities increases.

The impact of U.S. bank loan announcements on the stock prices of the corporate borrowers has been decreasing during the two last decades with estimated two-day cumulative abnormal returns slipping from almost 200 basis points in the beginning of the 1980s to close to zero by the turn of the Century. We estimate excess returns before and after the onset of the most recent financial crisis. We find that while prior to August 2007 returns were indeed close to zero, afterwards returns jump back up to around 200 basis points. We surmise that in a booming credit market the certification of corporate borrowers by banks started to play a lesser role, while during the crisis the banks’ role was revitalized. Consistent with this interpretation we find that after August 2007 excess returns increase especially for loans with a longer maturity, and for smaller, levered, less profitable or lowly rated firms.

We investigate whether banks’ initial responses during the first wave of the COVID-19 pandemic in supporting their customers, communities, and governments were perceived as value-enhancing by investors. Using a unique responsible banking measure for a sample of the largest US and European commercial banks, we find a negative relationship between responsible bank behavior and stock market performance, particularly in the first wave of the pandemic. We also find that riskier banks were affected more negatively if they behaved responsibly. Overall, our findings show that banks’ responsible behavior during a crisis reduces, or at best is not relevant to, shareholder value.

We assess the relative effect of securitization activity on banks’ lending rates employing a uniquely detailed dataset from the euro-denominated syndicated loan market. We find that in the run-up to the 2007–2009 crisis banks more active at originating asset-backed securities did not price their loans more aggressively (i.e. with narrower lending spreads) than non-active banks. We show that also within the set of loans that were previously securitized, the relative level of securitization activity by the originating bank is not related to narrower lending spreads. Our findings, which are limited to the cross-sectional impact of securitization, suggest that the effect of securitization on the cost of corporate funding appears to be quite limited.

This study investigates the impact of skilled labor mobility on bank fragility. We construct a novel bank-level measure of skilled labor mobility using job-posting data and show that it significantly increases bank default probability. The effect is driven entirely by demand for risk officers, identifying risk management capacity as the specific mechanism. The effect is amplified by competition and is concentrated among banks experiencing net employee outflows. We further document that legal restrictions on labor mobility weaken the potential detrimental effect. Our findings indicate that skilled labor mobility exacerbates bank fragility, yet targeted policies can bolster resilience against possible adverse effects from labor market frictions.

We leverage differences in central bank independence and financial stability sentiment across countries to investigate the variability in banks’ stock market reactions to prudential policy announcements during the COVID-19 crisis. Our findings reveal that the relaxation of both macro- and micro-prudential policies leads to negative cumulative abnormal returns (CARs), the reaction being attenuated in countries where the central bank is more independent or communicates deteriorations in financial stability. The CARs around the announcement dates are 0.75 percentage points (pp) and 6.89 pp higher for macro- and micro-prudential policy announcements, respectively, in countries with greater central bank independence compared to those with lesser independence. The difference is approximately 3.73 pp and 5.65 pp between banks located in countries where the central bank communicates a negative sentiment about financial stability, compared to those where a positive sentiment is conveyed. The positive impact of higher degrees of central bank independence and deteriorations in financial stability sentiment on bank market valuation is enhanced for smaller banks, as well as for banks in countries with greater fiscal flexibility and a higher prevalence of privately owned banks. (181 words)

We examine the association between country-level sectoral credit dynamics and bank-level systemic risk. Contrary to most studies that only delve into broad-based credit development, we focus on sectoral credit allocation, specifically to households versus firms, and to the tradable versus non-tradable sector. Based on a global sample of 417 banks across 46 countries over the period 2000-2014, we find that lending to households and corporates in the non-tradable sector is positively associated with system-wide distress. Conversely, credit granted to corporations and to the tradable sector negatively correlates with banks’ systemic behavior. Sub-sample analysis shows that risks from household lending are transmitted through small banks, whereas non-tradable lending is transmitted through large banks. Moreover, banks located in emerging market and developing economies exhibit enhanced systemic behavior against the backdrop of higher household and tradable credit growth, whereas credit to non-tradable sector firms tends to increase systemic fragility of banks in advanced economies. By the same token, the results differ for the pre-crisis and crisis/post-crisis periods, with the full sample findings driven by the crisis/post-crisis timespan. The findings emphasize critical policy implications considering sectoral heterogeneity, bank size, country of incorporation of banks, and periods of financial tranquillity/instability. Authorities can intervene in the most systemic economic sectors and limit the accumulation of “bad credit” and preserve systemic resilience, while still benefiting from the positive impact of “good credit” on growth and financial stability.

Using an extensive matched hedge fund-prime broker panel dataset for the period 2001–2021, we document a strong positive relationship between hedge fund leverage and prime broker’s stock price crash risk after controlling for other crash risk drivers. Our results are not only statistically, but also economically significant, showing that a one-standard-deviation increase in hedge fund leverage is associated on average with an increase of around 5% of a standard deviation in the negative skewness or the down-to-up-volatility of bank stock returns. Moreover, they remain robust when accounting for endogeneity and conducting many robustness checks. We also document that some investment strategies, such as one focusing on fixed income, appear to decrease the slope of the risk metrics of prime brokers, and ultimately leading to lower stock price crash risk.

We examine whether the European Central Bank (ECB) President’s communication tone is systematically related to market-based measures of euro area bank risk. Using Loughran–McDonald dictionaries, we construct quarterly indicators of textual tone and readability from ECB presidential statements over 2008Q1–2024Q4. We link these indicators to country-level bank credit default swap (CDS) indices for euro area member states. Our analysis focuses on uncertainty-related and constraining language as communication dimensions especially relevant to financial stability. We estimate panel regressions with macro-financial controls, horse-race specifications, and deploy principal component analysis to distinguish overlapping sentiment dimensions, with additional robustness checks in first differences. A more uncertainty-laden and constraining ECB presidential tone is associated with higher bank CDS spreads, even after controlling for macro-financial fundamentals. Lower readability of ECB statements is likewise linked to greater bank stress, indicating that both the tone and the clarity of central bank communication matter for bank-risk pricing. The association between bank CDS spreads and ECB communication tone is more pronounced during turbulent than tranquil periods. Our findings are consistent with a sentiment-guidance channel through which central bank communication is reflected in perceptions of bank fragility beyond traditional policy and macro-financial factors. They indicate that the tone, complexity, and crisis-contingent framing of ECB communication are economically relevant for financial-stability pricing and the sovereign-bank nexus in the euro area.