How did policy measures affect the banking sector?
In this paper, Demirguc-Kunt and al., use bank stock prices from around the world to assess the impact of the pandemic on the banking sector. In addition they combine bank stock prices with a global database on financial sector policy responses during the pandemic in order to examine the role of different policy initiatives in addressing the stress to banks. Their findings indicate:
- 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. Results suggest that liquidity support and borrower assistance measures had the greatest positive impact on bank abnormal returns. Illiquid banks benefited most from liquidity support, whereas larger banks and public banks saw increased abnormal returns with the announcement of borrower assistance policies.
- The impact of prudential measures appeared limited, except in countries that are not part of the Basel Committee where such forbearance actually had a negative impact on bank returns. This suggests that the downside risk from depletion of capital buffers is perceived to be significant for those banks.
Banking Sector Performance During the COVID-19 Crisis
Authors: Asli Demirguc-Kunt, Alvaro Pedraza, Claudia Ruiz-Ortega
From: World Bank
Going forward – the role of dividends
Finnegan and al. consider two recovery scenarios for the U.S. in order to evaluate the stability of the banking sector going forward: a “V-shaped” scenario, in which economic activity plunges sharply in the second quarter of 2020 but rebounds quickly in the second half of the year; an “L-shaped” scenario in which economic activity plunges more deeply than in the V-shaped scenario and recovers very slowly over the next three years. They find that:
- The industry-average CET1 ratio falls from 12.2 percent in the fourth quarter of 2019 to a minimum of 10.5 percent in the V-shaped scenario and to 8.0 percent in the L-shaped scenario when banks continue to pay dividends, amounting to drops of 170 and 420 basis points, respectively.
- Suspending dividends, on the other hand, leads to CET1 ratios that are 150 basis points higher. In this case, banks are less prone to reduce their capital buffers and thus have more room to increase lending.
The Banking Industry and COVID-19: Lifeline or Life Support?
By: Madeline Finnegan, Sarah Ngo Hamerling, Beverly Hirtle, Anna Kovner, Stephan Luck, and Matthew Plosser – Federal Reserve Bank of New York
