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How Did Banks and Investors Respond to the 2020 Stress Test Results?

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Abstract

In this paper, I examine how the announcement of the payout restrictions influenced bank capital levels and stock prices. I find that the restrictions helped build capital levels at large banks but may have indirectly hampered stock price returns. First, I show that surprisingly strong income growth combined with the payout restrictions drove capital to near record levels during this period. Second, I show that the payout restrictions had only a minimal effect on stock prices for most banks. Instead, the threat of increased supervisory stringency appears to have generated more persistent effects on stock prices, particularly for directly affected banks and those near the supervisory threshold. My results suggest that the post-GFC supervisory preference for payouts to be conducted primarily through repurchases, rather than dividends, provided a capital conservation channel that had only modest effects on bank stock returns.

Suggested Citation

  • W. Blake Marsh, 2022. "How Did Banks and Investors Respond to the 2020 Stress Test Results?," Economic Review, Federal Reserve Bank of Kansas City, vol. 107(no.1), February.
  • Handle: RePEc:fip:fedker:93662
    DOI: 10.18651/ER/v107n1Marsh
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    References listed on IDEAS

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    1. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    2. G.M. Constantinides & M. Harris & R. M. Stulz (ed.), 2003. "Handbook of the Economics of Finance," Handbook of the Economics of Finance, Elsevier, edition 1, volume 1, number 1.
    3. G.M. Constantinides & M. Harris & R. M. Stulz (ed.), 2003. "Handbook of the Economics of Finance," Handbook of the Economics of Finance, Elsevier, edition 1, volume 1, number 2.
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    1. Corbalán, Juan & Ferrer, Román, 2025. "The impact of share repurchases on bank operating performance after the global financial crisis: A comparison between the U.S. and Europe," International Review of Economics & Finance, Elsevier, vol. 98(C).

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