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Pricing Tail Risks: Bank Equity Returns During the 2023 Bank Stress

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Abstract

Did bank equity prices reflect growing sector imbalances before the 2023 failure of Silicon Valley Bank? We find that banks with higher reliance on uninsured deposits, or with higher marked-to-market leverage, had lower equity returns prior to SVB's collapse. Although markets priced uninsured deposits and high leverage individually, their interaction was not reflected in market prices prior to SVB’s failure. Post-SVB, banks with less ability to meet outflows without severely depleting capital, and banks with too little useable liquidity relative to runnable funding, experienced larger stock price declines, beyond what other fundamentals and business model risks explain. In addition, we highlight evidence of feedback between equity prices and balance sheet management: banks with lower returns in 2023:Q1 were more likely to rely heavily on reciprocal deposits by 2023:Q2.

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  • Shawn Kimble & Matthew P. Seay, 2025. "Pricing Tail Risks: Bank Equity Returns During the 2023 Bank Stress," Finance and Economics Discussion Series 2025-078, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2025-78
    DOI: 10.17016/FEDS.2025.078
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    1. Huberdeau-Reid, David A. & Pennacchi, George G., 2025. "Adverse selection in deposit insurance and government funding following the 2023 banking crisis," Journal of Financial Intermediation, Elsevier, vol. 63(C).
    2. Jiang, Erica Xuewei & Matvos, Gregor & Piskorski, Tomasz & Seru, Amit, 2024. "Monetary tightening and U.S. bank fragility in 2023: Mark-to-market losses and uninsured depositor runs?," Journal of Financial Economics, Elsevier, vol. 159(C).
    3. Natalia Fischl-Lanzoni & Martin Hiti & Nathan Kaplan & Asani Sarkar, 2024. "Investor Attention to Bank Risk During the Spring 2023 Bank Run," Staff Reports 1095, Federal Reserve Bank of New York.
    4. Marco Cipriani & Thomas M. Eisenbach & Anna Kovner, 2024. "Tracing Bank Runs in Real Time," Working Paper 24-10, Federal Reserve Bank of Richmond.
    5. Mark Warren, 2025. "The rise and fall of Silvergate Bank: lessons for prudential regulation of crypto-sector banking," Journal of Banking Regulation, Palgrave Macmillan, vol. 26(1), pages 62-84, March.
    6. Andrew Metrick, 2024. "The Failure of Silicon Valley Bank and the Panic of 2023," Journal of Economic Perspectives, American Economic Association, vol. 38(1), pages 133-152, Winter.
    7. Shawn Kimble & Matthew P. Seay, 2024. "The interaction of bank leverage, interest-rate risk, and runnable funding," FEDS Notes 2024-08-30-2, Board of Governors of the Federal Reserve System (U.S.).
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    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • 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

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