Words That Move Markets: ECB Presidential Tone and Euro Area Bank CDS Spreads

Dimitrios Anastasiou, Theodore D. Bratis, Apostolos G. Katsafados and Steven Ongena
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Dimitrios Anastasiou: Athens University of Economics and Business - Department of Business Administration
Theodore D. Bratis: Athens University of Economics and Business - Department of Business Administration
Apostolos G. Katsafados: Athens University of Economics and Business - Department of Business Administration
Steven Ongena: University of Zurich - Department Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)

No 26-35, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We examine whether, and through which channels, the European Central Bank (ECB) President's communication tone affects 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 that are especially relevant for financial stability. We estimate panel regressions with macro-financial controls, horse-race specifications and deploy principal component analysis to distinguish overlapping sentiment dimensions and conduct additional endogeneity checks to address reverse causality. A more uncertainty-laden and constraining ECB presidential tone is associated with higher bank CDS spreads, even after controlling for macrofinancial fundamentals. Lower readability of ECB statements is likewise linked to greater bank stress, indicating both the tone and the clarity of central bank communication matter for bank risk. The sensitivity of bank CDS spreads to ECB communication tone is more pronounced during turbulent than in tranquil periods. Our findings highlight a sentiment-guidance channel through which central bank communication shapes perceptions of bank fragility beyond traditional policy and macro-financial factors. They suggest that the design of ECB communication, its tone, complexity, and crisis-contingent framing, has non-trivial implications for financial stability and the sovereign-bank nexus in the euro area.

Keywords: CDS bank stress; Financial stability; Sovereign-bank uncertainty nexus; Textual analysis (search for similar items in EconPapers)
JEL-codes: E58 G15 G41 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2026-04
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