Market Reaction to EU Crd IV Regulation in the Banking Industry

Abstract

This paper aims to provide evidence on the market reaction to the announcements of the EU CRD IV regulation in the EU banking industry and examine their determinants at the bank and country levels. EU CRD IV came up in the aftermath of the financial crisis (2007-2008), and it is recognized as the most notable regulatory initiative at the European level to increase overall bank transparency. Employing an event study approach around 15 announcements between 2011 and 2013, we document a negative market reaction on a sample of 145 listed European banks indicating that transparency increases are borne by shareholders, with detrimental impacts on bank stock prices. We show that investors negatively perceive the introduction of this regulation, with more pronounced reactions for poorly transparent, large, and complex banks located in countries with high exposure to sovereign indebtedness. Our findings contribute to the debate on bank transparency matters.

Keywords: Market reaction, Transparency regulation, Post-crisis, EU banks