Permanent Capital Losses after Banking Crises

106 Pages Posted: 8 Mar 2021 Last revised: 20 Jul 2021

See all articles by Matthew Baron

Matthew Baron

Cornell University - Samuel Curtis Johnson Graduate School of Management

Luc Laeven

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Julien Pénasse

Universite du Luxembourg

Yevhenii Usenko

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Multiple version iconThere are 3 versions of this paper

Date Written: July 08, 2024

Abstract

We study the persistence of bank distress and the effectiveness of policy interventions in restoring bank capitalization across banking crises in 46 economies since 1870. We find that bank stocks experience large, permanent declines at the onset of crises. These losses predict commensurate long-term declines in banks’ cash flows and book values and low future equity returns. Bank losses in crises are primarily due to asset quality deterioration, not early liquidation during panics. Forceful liquidity-based interventions predict only small, temporary increases in bank market value. Our findings indicate that banking crises stem primarily from fundamental losses rather than temporary illiquidity or discount rate rises. Government recapitalizations have historically been small and delayed, leading to persistent bank undercapitalization. Overall, policy interventions have generally been insufficient in restoring bank value after crises.

JEL Classification: G01, G11, G12, G15, G21

Suggested Citation

Baron, Matthew and Laeven, Luc A. and Pénasse, Julien and Usenko, Yevhenii, Permanent Capital Losses after Banking Crises (July 08, 2024). Available at SSRN: https://ssrn.com/abstract=3762043 or http://dx.doi.org/10.2139/ssrn.3762043

Matthew Baron (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

Luc A. Laeven

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Julien Pénasse

Universite du Luxembourg ( email )

L-1511 Luxembourg
Luxembourg

Yevhenii Usenko

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

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