Permanent Capital Losses after Banking Crises

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