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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Citations: View citations in EconPapers (4)

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Working Paper: Does diversification protect European banks' market valuation in a pandemic? (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:44:y:2022:i:c:s1544612321001744

DOI: 10.1016/j.frl.2021.102093

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