Trading by bank insiders before and during the 2007–2008 financial crisis

Abstract

This paper investigates whether bank executives took excessive risks in the run&up to the recent financial crisis by analyzing their trading in their own bank’s stock. I examine whether insiders of banks with the highest exposure to subprime risk changed their insider trading before the onset of the crisis. Two main findings emerge. First, there are large differences in insider trading patterns between high& and low&exposure banks start ing in mid&2006, when US housing prices first declined. The economic effect is sizeable: insiders of high&exposure banks sell 30% more equity than insiders of low&exposure banks. This in crease in insider sales precedes the fall of bank stock prices and the surge in banks’ CDS spreads by at least 12 months. Second, there is no difference in insider trading patterns between banks with high and low exposure in 2004&2005. I conclude that insiders of high&exposure banks revis ed their views on the profitability of their banks’ investments following the reversal in the housing market.