Crisis-Related Shifts in the Market Valuation of Banking Activities
AbstractWe examine changes in the market valuation of banking activities over the last decade, focusing on the effects of the financial crisis. Our valuation model recognizes that banks create value through the types of assets and liabilities that they create and the various types of risk they undertake (including their leverage, their lending risk, and their interest rate risk). The model also allows for heterogeneous bank income streams, dividend signaling effects, and changes in capitalization rates for income streams over time depending on changing market conditions. This approach explains substantial cross-sectional variation in observed market-to-book values, allowing us to identify the market pricing of various banking activities and changes in market pricing over time. We find that the declines in bank stock values since 2007 reflect declining values of various categories of banking activity and changes in market conditions. Dividend payments matter for market values increasingly over time. “Carry-trade” effects from taking on interest rate risk are also apparent. The effects of leverage on bank valuation changed sign during the crisis; while the market rewarded high leverage with higher market values prior to the crisis, leverage become associated with lower values during and after the crisis. Contrary to the view that the declines in market-to-book values for U.S. banks from 2006-2011 mainly reflect unrecognized losses, we find that other factors explain most of the decline in market-to-book ratios. Although model parameters do change over time, more than three-quarters of the change in market-to-book values that occurred from 2006 to the end of 2008 were predictable based on changes in fundamental determinants of value using the model coefficients estimated in 2006.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17868.
Date of creation: Feb 2012
Date of revision:
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
More information through EDIRC
Find related papers by JEL classification:
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- G01 - Financial Economics - - General - - - Financial Crises
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Charles W. Calomiris & Doron Nissim, 2007. "Activity-Based Valuation of Bank Holding Companies," NBER Working Papers 12918, National Bureau of Economic Research, Inc.
- Demsetz, Rebecca S & Strahan, Philip E, 1997. "Diversification, Size, and Risk at Bank Holding Companies," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 29(3), pages 300-313, August.
- Calomiris, Charles W & Kahn, Charles M, 1991. "The Role of Demandable Debt in Structuring Optimal Banking Arrangements," American Economic Review, American Economic Association, American Economic Association, vol. 81(3), pages 497-513, June.
- Laux, Christian & Leuz, Christian, 2009.
"Did fair-value accounting contribute to the financial crisis?,"
CFS Working Paper Series
2009/22, Center for Financial Studies (CFS).
- Christian Laux & Christian Leuz, 2010. "Did Fair-Value Accounting Contribute to the Financial Crisis?," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 24(1), pages 93-118, Winter.
- Christian Laux & Christian Leuz, 2009. "Did Fair-Value Accounting Contribute to the Financial Crisis?," NBER Working Papers 15515, National Bureau of Economic Research, Inc.
- Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 51(3), pages 393-414, July.
- Jayaratne, Jith & Morgan, Donald P, 2000. "Capital Market Frictions and Deposit Constraints at Banks," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 32(1), pages 74-92, February.
- Guillaume Plantin & Haresh Sapra & Hyun Shin, .
"Marking to Market: Panacea or Pandora’s Box ?,"
GSIA Working Papers, Carnegie Mellon University, Tepper School of Business
2005-E4, Carnegie Mellon University, Tepper School of Business.
- Charles W. Calomiris & Berry Wilson, 2004. "Bank Capital and Portfolio Management: The 1930s "Capital Crunch" and the Scramble to Shed Risk," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 77(3), pages 421-456, July.
- Penas, Maria Fabiana & Unal, Haluk, 2004. "Gains in bank mergers: Evidence from the bond markets," Journal of Financial Economics, Elsevier, Elsevier, vol. 74(1), pages 149-179, October.
- O'Hara, Maureen & Shaw, Wayne, 1990. " Deposit Insurance and Wealth Effects: The Value of Being "Too Big to Fail."," Journal of Finance, American Finance Association, American Finance Association, vol. 45(5), pages 1587-1600, December.
- Berger, Allen N. & Demsetz, Rebecca S. & Strahan, Philip E., 1999.
"The consolidation of the financial services industry: Causes, consequences, and implications for the future,"
Journal of Banking & Finance, Elsevier,
Elsevier, vol. 23(2-4), pages 135-194, February.
- Allen N. Berger & Rebecca S. Demsetz & Philip E. Strahan, 1998. "The consolidation of the financial services industry: causes, consequences, and implications for the future," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 1998-46, Board of Governors of the Federal Reserve System (U.S.).
- Rajan, Raghuram G, 1992. " Insiders and Outsiders: The Choice between Informed and Arm's-Length Debt," Journal of Finance, American Finance Association, American Finance Association, vol. 47(4), pages 1367-400, September.
- Knaup, M. & Wagner, W.B., 2009. "A Market Based Measure of Credit Quality and Banks' Performance During the Subprime Crisis," Discussion Paper, Tilburg University, Center for Economic Research 2009-35 S, Tilburg University, Center for Economic Research.
- Ing-Haw Cheng & Harrison Hong & Jose A. Scheinkman, 2010.
"Yesterday's Heroes: Compensation and Creative Risk-Taking,"
NBER Working Papers
16176, National Bureau of Economic Research, Inc.
- Ing-Haw Cheng & Harrison Hong & Jose Scheinkman, 2010. "Yesterday’s Heroes: Compensation and Creative Risk-Taking," NBER Chapters, in: Market Institutions and Financial Market Risk National Bureau of Economic Research, Inc.
- Craig O. Brown & I. Serdar Dinç, 2005. "The Politics of Bank Failures: Evidence from Emerging Markets," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 120(4), pages 1413-1444, November.
- Stiroh, Kevin J, 2004.
"Diversification in Banking: Is Noninterest Income the Answer?,"
Journal of Money, Credit and Banking, Blackwell Publishing,
Blackwell Publishing, vol. 36(5), pages 853-82, October.
- Kevin J. Stiroh, 2002. "Diversification in banking: is noninterest income the answer?," Staff Reports, Federal Reserve Bank of New York 154, Federal Reserve Bank of New York.
- Kroszner, Randall S & Strahan, Philip E, 1996. " Regulatory Incentives and the Thrift Crisis: Dividends, Mutual-to-Stock Conversions, and Financial Distress," Journal of Finance, American Finance Association, American Finance Association, vol. 51(4), pages 1285-1319, September.
- Nissim, Doron, 2003. " Reliability of Banks' Fair Value Disclosure for Loans," Review of Quantitative Finance and Accounting, Springer, Springer, vol. 20(4), pages 355-84, June.
- Craig O. Brown & I. Serdar Dinç, 0. "Too Many to Fail? Evidence of Regulatory Forbearance When the Banking Sector Is Weak," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 24(4), pages 1378-1405.
- Jeremy C. Stein & Anil K. Kashyap, 2000. "What Do a Million Observations on Banks Say about the Transmission of Monetary Policy?," American Economic Review, American Economic Association, American Economic Association, vol. 90(3), pages 407-428, June.
- Keeley, Michael C, 1990. "Deposit Insurance, Risk, and Market Power in Banking," American Economic Review, American Economic Association, American Economic Association, vol. 80(5), pages 1183-1200, December.
- Antoniades, Adonis, 2013. "Liquidity Risk and the Credit Crunch of 2007-2009: Evidence from Micro-Level Data on Mortgage Loan Applications," MPRA Paper 49270, University Library of Munich, Germany.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.