Permanent Capital Losses after Banking Crises

Category: Finance Seminar
When: 08 October 2024
, 12:00
 - 13:15
Where: HoF E.01

In Cooperation with ECB

Permanent Capital Losses after Banking Crises

Matthew Baron, Cornell University (with Luc Laeven, Julien Pénasse and Yevhenii Usenko)

Abstract:

We study the persistence of bank distress and the effectiveness of policy interventions in restoring bank capitalization across banking crises in 46 economies since 1870. We find that bank stock experience large permanent declines at the onset of crises. These losses predict commensurate long-term declines in banks' cash flows and book values and low future equity returns. Bank losses in in crises are primarily due to asset quality deterioration, not early liquidations during panics. Forceful liquidity-bases interventions predict only small, temporary increases in bank market value. Overall, our findings indicate that losses during banking crises are primarily permanent fundamental losses and are not simply due to temporary illiquidity, discount rate effects, or fire sales. Government recapitalizations have historically been small and delayed, leading to persistent bank undercapitalization. Overall, policy interventions have generally been insufficient in restoring bank value after crises.

Paper (PDF)

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