Why did bank stocks crash during COVID-19?

Viral Acharya, Robert Engle and Sascha Steffen

No 15901, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study the crash of bank stock prices during the COVID-19 pandemic. We find evidence consistent with a “credit line drawdown channel†. Stock prices of banks with large ex-ante exposures to undrawn credit lines as well as large ex-post gross drawdowns decline more. The effect is attenuated for banks with higher capital buffers. These banks reduce term loan lending, even after policy measures were implemented. We conclude that bank provision of credit lines appears akin to writing deep out-of-the-money put options on aggregate risk; we show how the resulting contingent leverage and stock return exposure can be incorporated tractably into bank capital stress tests.

Keywords: Credit lines; Liquidity risk; Bank capital; Loan supply; Stress tests; Pandemic; Covid-19 (search for similar items in EconPapers)
JEL-codes: G01 G21 (search for similar items in EconPapers)
Date: 2021-03
New Economics Papers: this item is included in nep-ban, nep-cwa and nep-rmg
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Citations: View citations in EconPapers (29)

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