Investor Attention to Bank Risk During the Spring 2023 Bank Run

We examine how investors’ perception of bank balance sheet risk evolved before and during the March-April 2023 bank run. 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 the market’s perception of bank risk shifted in both the time series and the cross-section. From January 2022 to February 2023, both factor betas were mostly insignificant, but after the bank run started, they became positive and significant for all banks on average. However, in the cross-section, only the factor betas of banks put on downgrade watch on March 13 were significant, consistent with our finding that this announcement was informative. When additional banks were downgraded in April, their factor betas also became significant, even though we find the April announcements to be noninformative for these banks. We suggest that investors with limited attention focused on the banks included in the April announcements to update their priors on balance sheet risk.