Investor Attention to Bank Risk During the Spring 2023 Bank Run

We examine how investors’ perceptions of bank balance sheet risk evolved before and during the bank run in March-April 2023. To do so, we estimate the covariance (“beta”) of bank excess stock returns with returns on factors constructed from long-short portfolios sorted on shares of uninsured deposits and unrealized losses on securities. We find that investor perception of bank risk shifted, as the factor betas are insignificant before the bank run but become positive and significant during the run. In the crosssection, increases in the betas occurred for a limited set of banks and cannot be predicted by balance sheet risk in Q3 or Q4 of 2022. Instead, we find evidence that published bank news coordinated investor actions: they are informative to stock investors and significantly affect factor betas during the bank run, even three days after publication. In particular, for banks downgraded by rating agencies during the run, news arrivals increased (decreased) the share of factor betas that responded positively (negatively) to news. These results suggest that stock market investors have limited ability to discipline banks in a timely fashion during a bank run.