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Government Guarantees and the Valuation of American Banks

Andrew Atkeson, Adrien d'Avernas, Andrea L. Eisfeldt and Pierre-Olivier Weill ()
Additional contact information
Andrew Atkeson: Federal Reserve Bank of Minneapolis
Adrien d'Avernas: Stockholm School of Economics
Andrea L. Eisfeldt: University of California, Los Angeles

No 567, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: Banks' ratio of the market value to book value of their equity was close to 1 until the 1990s, then more than doubled during the 1996-2007 period, and fell again to values close to 1 after the 2008 financial crisis. Sarin and Summers (2016) and Chousakos and Gorton (2017) argue that the drop in banks' market-to-book ratio since the crisis is due to a loss in bank franchise value or profitability. In this paper we argue that banks' market-to-book ratio is the sum of two components: franchise value and the value of government guarantees. We empirically decompose the ratio between these two components and find that a large portion of the variation in this ratio over time is due to changes in the value of government guarantees.

Keywords: Banking; Bank valuation; Bank financial soundness; Bank regulation; Risk shifting; Bank leverage (search for similar items in EconPapers)
JEL-codes: E44 G21 G28 G32 G38 H12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cfn and nep-mac
Date: 2018-06-19
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DOI: 10.21034/sr.567

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