Financial Crises and Transmission of Shocks
Paper Session
Friday, Jan. 7, 2022 3:45 PM - 5:45 PM (EST)
- Chair: Samuel Hanson, Harvard University
Why Did Banks Stock Crash during COVID-19?
Abstract
We provide evidence consistent with a “credit-line drawdown channel” to explain the large and persistent crash of bank stock prices during the COVID-19 pandemic. Stock prices of banks with large ex-ante exposures to undrawn credit lines and large ex-post gross drawdowns declined more, especially of banks with weaker capital buffers. These banks reduced new lending, even after stabilization policies and even if drawdowns were accompanied by deposit inflows. Bank provision of credit lines appears akin to writing deep out-of-the-money put options on aggregate risk; we show how the resulting risks can be incorporated tractably into bank capital stress tests.Investing in Crises
Abstract
We investigate asset returns around banking crises in 44 advanced and emerging economies from 1960 to 2016. In contrast to the view that buying assets during banking crises is a profitable long-run strategy, we find that returns of equity and other asset classes often underperform following banking crises. This underperformance is particularly pronounced for bank stocks. The collapse in equity prices during crises is followed by lower dividends rather than a bounce back in prices, suggesting that the collapse is primarily driven by real damage to earnings and balance sheets, rather than temporary investor leverage constraints or illiquidity. Long-run returns and dividends can be predicted at the time of the crisis with debt-overhang-related measures. Our findings suggest that, even during the acute phase of banking crises, equity investors do not fully recognize the extent of bad loans made by banks and the long-term real consequences of crises.Discussant(s)
Lawrence Schmidt
,
Massachusetts Institute of Technology
Olivier Darmouni
,
Columbia University
Karsten Müller
,
NUS Business School
JEL Classifications
- G2 - Financial Institutions and Services