Abstract
This paper analyzes bank stock prices around the world to assess the impact of the COVID-19 pandemic on the banking sector. Using a global database of policy responses during the crisis, the paper also examines the role of financial sector policy announcements on the performance of bank stocks. Overall, the results suggest that the crisis and the countercyclical lending role that banks are expected to play have put banking systems under significant stress, with bank stocks underperforming their domestic markets and other non-bank financial firms. The effectiveness of policy interventions has been mixed. Measures of liquidity support, borrower assistance, and monetary easing moderated the adverse impact of the crisis, but this is not true for all banks or in all circumstances. For example, borrower assistance and prudential measures exacerbated the stress for banks that are already undercapitalized and/or operate in countries with little fiscal space. These vulnerabilities will need to be carefully monitored as the pandemic continues to take a toll on the world’s economies.
Highlights
To reduce the spread of the novel COVID-19, governments enacted mitigation strategies based on social distancing, national quarantines, and shutdown of non-essential businesses
The spread of COVID-19 represents an unpresented global shock, with the disease itself and mitigation efforts –such as social distancing measures and partial and national lockdown measures– both having a significant impact on the economy
In an effort to facilitate this, central banks and governments around the world enacted a wide range of policy measures to provide greater liquidity and support the flow of credit
Summary
To reduce the spread of the novel COVID-19, governments enacted mitigation strategies based on social distancing, national quarantines, and shutdown of non-essential businesses. To study the stock market reaction to different policy measures, we identify financial sector initiatives by government authorities from February 2 to April 17. We focus on large cross-border banks in our sample and examine the reaction of their stock prices when policies are announced in countries where they have subsidiaries. Given the extraordinary scale and unprecedented nature of the crisis, it is difficult to quantify the effect of the shock versus the impact of the ensuing economic policies We add to this literature by examining the effects of the pandemic on stock returns of banks based on an event study methodology. Since the shock is truly exogenous to the financial sector, the overwhelming response from policymakers has been to relax regulatory requirements and use capital buffers: During our sample, 91% of countries used prudential measures. The liquidity ratio of the median bank in the sample is 7%, with banks
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