Reaction of British bank share prices to Citicorp's announced $3 billion increase in loan-loss reserves

Abstract

This study assesses the impact of Citicorp's announcement of a $3 billion increase in loan-loss reserves on May 19, 1987, on the share prices of British banks. The announcement may have had an impact on British banks because, like Citicorp, the major British ones have a high degree of exposure to the debt of less developed countries (LDCs). Musumeci and Sinkey detected a favorable reaction of U.S. money-center banks to the announcement. Because of disparate bank characteristics and regulations between the U.S. and the United Kingdom, share prices of British banks may be affected in a different manner than U.S. banks. The results of our study indicate that British bank share prices were adversely affected by the announcement. Our findings confirm that (1) the strategy of a bank in one country may not only influence other banks in that country, but foreign banks as well, and (2) the effects on banks can be dependent on the country of origin.