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Why Did Bank Stocks Crash During COVID-19?

Author

Listed:
  • Viral V. Acharya
  • Robert F. Engle III
  • Maximilian Jager
  • Sascha Steffen

Abstract

A two-sided "credit-line channel" – relating to drawdowns and repayments – explains the severe drop and partial subsequent recovery in bank stock prices during the COVID-19 pandemic. Banks with greater exposure to undrawn credit lines saw larger stock price declines but performed better before the pandemic and after the policy interventions. Despite deposit inflows, high drawdowns led to reduced bank lending, suggestive of capital encumbrance upon drawdowns. Repayments of credit lines unencumbered capital which explains the stock price recovery starting Q2 2020. Bank provision of credit lines resembles writing deep out-of-the-money put options on aggregate risk, and we propose how to incorporate this feature into bank capital stress tests.

Suggested Citation

  • Viral V. Acharya & Robert F. Engle III & Maximilian Jager & Sascha Steffen, 2021. "Why Did Bank Stocks Crash During COVID-19?," NBER Working Papers 28559, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:28559
    Note: AP CF EFG
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    References listed on IDEAS

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    More about this item

    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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