Does diversification protect European banks' market valuation in a pandemic?

Mathieu Simoens and Rudi Vander Vennet

Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

Abstract: We use the Covid-19 pandemic to assess whether diversification in various dimensions can protect European banks from substantial negative valuation shocks. Our results demonstrate that functional diversification acts as an economically significant shock absorber: it mitigates banks' stock market decline by approximately 10 percentage points. Loan portfolio diversification also contributes to dampening the valuation shock, but with a much lower impact (4.4 percentage points). Geographical diversification fails to act as a shock absorber. Banks with lower pre-Covid systematic risk, higher liquidity buyers, higher cost eficiency and active in countries with better post-Covid growth prospects weathered the storm better.

Keywords: European banks; Covid-19; valuation; functional diversification; geographical diversification (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2021-02
New Economics Papers: this item is included in nep-fmk and nep-rmg
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Citations: View citations in EconPapers (2)

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Journal Article: Does diversification protect European banks’ market valuations in a pandemic? (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:rug:rugwps:21/1009

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