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Why did bank stocks crash during COVID-19?

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  • Acharya, Viral
  • Engle, Robert
  • Steffen, Sascha

Abstract

We study the crash of bank stock prices during the COVID-19 pandemic. We find evidence consistent with a “credit line drawdown channel†. Stock prices of banks with large ex-ante exposures to undrawn credit lines as well as large ex-post gross drawdowns decline more. The effect is attenuated for banks with higher capital buffers. These banks reduce term loan lending, even after policy measures were implemented. We conclude that bank provision of credit lines appears akin to writing deep out-of-the-money put options on aggregate risk; we show how the resulting contingent leverage and stock return exposure can be incorporated tractably into bank capital stress tests.

Suggested Citation

  • Acharya, Viral & Engle, Robert & Steffen, Sascha, 2021. "Why did bank stocks crash during COVID-19?," CEPR Discussion Papers 15901, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:15901
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    More about this item

    Keywords

    Credit lines; Liquidity risk; Bank capital; Loan supply; Stress tests; Pandemic; Covid-19;
    All these keywords.

    JEL classification:

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

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