Why Did Bank Stocks Crash during COVID-19?

74 Pages Posted: 9 Mar 2021 Last revised: 2 Sep 2021

See all articles by Viral V. Acharya

Viral V. Acharya

Professor; New York University - Leonard N. Stern School of Business; New York University (NYU) - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Robert F. Engle

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); New York University (NYU) - Volatility and Risk Institute

Sascha Steffen

Frankfurt School of Finance & Management

Multiple version iconThere are 3 versions of this paper

Date Written: August 31, 2021

Abstract

We provide evidence consistent with a “credit-line drawdown channel” to explain the large and persistent crash of bank stock prices during the COVID-19 pandemic. Stock prices of banks with large ex-ante exposures to undrawn credit lines and large ex-post gross drawdowns declined more, especially of banks with weaker capital buffers. These banks reduced new lending, even after stabilization policies and even if drawdowns were accompanied by deposit inflows. Bank provision of credit lines appears akin to writing deep out-of-the-money put options on aggregate risk; we show how the resulting risks can be incorporated tractably into bank capital stress tests.

Keywords: Credit lines, liquidity risk, bank capital, loan supply, stress tests, pandemic, COVID-19

JEL Classification: G01, G21

Suggested Citation

Acharya, Viral V. and Acharya, Viral V. and Engle, Robert F. and Steffen, Sascha, Why Did Bank Stocks Crash during COVID-19? (August 31, 2021). NYU Stern School of Business Forthcoming, Available at SSRN: https://ssrn.com/abstract=3799590 or http://dx.doi.org/10.2139/ssrn.3799590

Viral V. Acharya

Professor ( email )

44 West 4th Street
Suite 9-160
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HOME PAGE: http://www.stern.nyu.edu/~vacharya

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States
2129980354 (Phone)
2129954256 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~vacharya

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Robert F. Engle

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

New York University (NYU) - Volatility and Risk Institute ( email )

44 West 4th Street
New York, NY 10012
United States

Sascha Steffen (Contact Author)

Frankfurt School of Finance & Management ( email )

Adickesallee
32-34
Frankfurt, 60322
Germany
16097326929 (Phone)

HOME PAGE: http://www.sascha-steffen.de

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