Pricing Tail Risks: Bank Equity Returns During the 2023 Bank Stress

Shawn Kimble () and Matthew P. Seay
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Matthew P. Seay: https://www.federalreserve.gov/econres/matthew-p-seay.htm

No 2025-078, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Did bank equity prices reflect growing sector imbalances before the 2023 failure of Silicon Valley Bank? We find that banks with higher reliance on uninsured deposits, or with higher marked-to-market leverage, had lower equity returns prior to SVB's collapse. Although markets priced uninsured deposits and high leverage individually, their interaction was not reflected in market prices prior to SVB’s failure. Post-SVB, banks with less ability to meet outflows without severely depleting capital, and banks with too little useable liquidity relative to runnable funding, experienced larger stock price declines, beyond what other fundamentals and business model risks explain. In addition, we highlight evidence of feedback between equity prices and balance sheet management: banks with lower returns in 2023:Q1 were more likely to rely heavily on reciprocal deposits by 2023:Q2.

Keywords: Financial Institutions; Bank Capital; Interest Rate Risk; Liquidity (search for similar items in EconPapers)
JEL-codes: G20 G21 G28 (search for similar items in EconPapers)
Pages: 26 p.
Date: 2025-09-05
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2025-78

DOI: 10.17016/FEDS.2025.078

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