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Why Did Bank Stocks Crash during COVID-19?

Author

Listed:
  • Viral V Acharya
  • Robert Engle
  • 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 outside of crises periods. 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 put options on aggregate risk, and we propose how to incorporate this feature into bank stress tests.

Suggested Citation

  • Viral V Acharya & Robert Engle & Maximilian Jager & Sascha Steffen, 2024. "Why Did Bank Stocks Crash during COVID-19?," The Review of Financial Studies, Society for Financial Studies, vol. 37(9), pages 2627-2684.
    • Handle: RePEc:oup:rfinst:v:37:y:2024:i:9:p:2627-2684.
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    Keywords

    G01; G21;

    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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