Bank Stock Performance and Bank Regulation Around the Globe

Abstract

We analyze the effect of bank capital, regulation, and supervision on the annual stock performance of global banks during the period of 1999-2012. We study a large comprehensive panel of international banks and find that higher Tier 1 capital decreases a bank's stock performance over the whole sample period. However, during turbulent times stocks of more highly capitalized banks perform significantly better. Additionally, we find strong evidence that banks that are more likely to receive government bailout during financial distress realize smaller stock performance. In contrast, we find no convincing evidence that banks that generate higher non-interest income have a higher performance.

Bank stock performance during the COVID-19 crisis: does efficiency explain why Islamic banks fared relatively better?

“…Similarly, bank risk ( ) is negatively associated with the bank stock returns in both two models. This suggests that banks with higher market risk experienced lower stock returns during the crisis (Pelster et al, 2018 ). Furthermore, our results support the findings of Tong and Wei ( 2011 ) that banks with strong stock returns in the period leading up to the crisis, banks with a high , tend to fare worse during the crisis (Columns 1 and 2).…”

“…Second, beta ( ) measured by the correlation between the bank and market stock returns over the past year. Since the overall market experienced a significant loss during the current crisis, an increase in would be linked to a decline in stock prices (Pelster et al, 2018 ). Third, a measure of the momentum factor ( Momentum ), defined as the stock returns for the bank from December 31, 2018 to December 31, 2019.…”

Detecting zombie banks

“…Some studies also focus on regulatory constraints and as a consequence ability of banks' to benefit from loans (hence reducing their performance). Again, here the results are mixed, and where for example, Oino (2018), Pelster, Irresberger, and Weiß (2018) and Coccorese and Girardone (2020) find that despite the increase in capital the expansion or growth has surpassed the unit change in capital (although the estimated impact is relatively weak for the later study). Contrary to the positive impact findings, Martynova, Ratnovski, and Vlahu (2020) poise that more profitable banks have higher risk-taking incentives, consistent with a weakening of bank capital regulation.…”

Does macroprudential policy alleviate the adverse impact of COVID-19 on the resilience of banks?

“…2012 ). Meanwhile, a high Beta suggests that we would observe a larger decline in the stock price of a given bank during a crisis ( Pelster et al. 2018 ).…”

“…See Berger and Bouwman (2013) , Demirgüç–Kunt et al. (2013) and Pelster et al. (2018) for a review on the impact of bank capital, Fahlenbrach et al.…”