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Does diversification protect European banks’ market valuations in a pandemic?

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  • Simoens, Mathieu
  • Vander Vennet, Rudi

Abstract

We use the Covid-19 pandemic to assess whether diversification in various dimensions can protect European banks from substantial negative valuation shocks. Our results demonstrate that functional diversification acts as an economically significant shock absorber: it mitigates banks’ stock market decline by approximately 10 percentage points. Loan portfolio diversification also contributes to dampening the valuation shock, but with a much lower impact (4.4 percentage points). Geographical diversification fails to act as a shock absorber. Banks with lower pre-Covid systematic risk, higher liquidity buffers, higher cost efficiency and active in countries with better post-Covid growth prospects weathered the storm better.

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  • Simoens, Mathieu & Vander Vennet, Rudi, 2022. "Does diversification protect European banks’ market valuations in a pandemic?," Finance Research Letters, Elsevier, vol. 44(C).
    • Handle: RePEc:eee:finlet:v:44:y:2022:i:c:s1544612321001744
    DOI: 10.1016/j.frl.2021.102093
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    Cited by:

    1. Sylwester Kozak, 2021. "The Impact of COVID-19 on Bank Equity and Performance: The Case of Central Eastern South European Countries," Sustainability, MDPI, vol. 13(19), pages 1-15, October.
    2. Velasco, Pilar, 2022. "Is bank diversification a linking channel between regulatory capital and bank value?," The British Accounting Review, Elsevier, vol. 54(4).
    3. Iyer, Subramanian Rama & Simkins, Betty J., 2022. "COVID-19 and the Economy: Summary of research and future directions," Finance Research Letters, Elsevier, vol. 47(PB).
    4. Tran, Dung Viet & Bui, Dien Giau & Nguyen, Cuong & Hoang, Huy Viet, 2023. "Bank liquidity hoarding during the COVID-19 pandemic," Finance Research Letters, Elsevier, vol. 55(PB).
    5. Carlos S. Torres-Inga & Cristina Velasco-Heras & A. Javier Aguirre-de Juana & Guillermo E. Guevara-Viera & Raúl V. Guevara-Viera, 2022. "Technical Efficiency’s Nonparametric Analysis of Ecuadorian Saving and Credit Cooperatives before and during the Pandemic," Economies, MDPI, vol. 10(4), pages 1-15, April.

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    More about this item

    Keywords

    European banks; Covid-19; Valuation; Functional diversification; Geographical diversification;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G01 - Financial Economics - - General - - - Financial Crises

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