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Does diversification protect European banks’ market valuations in a pandemic?

Mathieu Simoens () and Rudi Vander Vennet

Finance Research Letters, 2022, vol. 44, issue C

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 buffers, higher cost efficiency 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)
Date: 2022
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DOI: 10.1016/

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