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Why Did Bank Stocks Crash During COVID-19?

Viral Acharya, Robert Engle, Maximilian Jager and Sascha Steffen

No 28559, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: A two-sided "credit-line channel" – relating to drawdowns and repayments – explains the severe drop and partial subsequent recovery in bank stock prices during the COVID-19 pandemic. Banks with greater exposure to undrawn credit lines saw larger stock price declines but performed better before the pandemic and after the policy interventions. Despite deposit inflows, high drawdowns led to reduced bank lending, suggestive of capital encumbrance upon drawdowns. Repayments of credit lines unencumbered capital which explains the stock price recovery starting Q2 2020. Bank provision of credit lines resembles writing deep out-of-the-money put options on aggregate risk, and we propose how to incorporate this feature into bank capital stress tests.

JEL-codes: G01 G21 (search for similar items in EconPapers)
Date: 2021-03
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cwa, nep-fmk and nep-rmg
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Citations: View citations in EconPapers (26)

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