Government Guarantees and the Valuation of American Banks

Abstract

Banks' ratio of the market value to book value of their equity was close to 1 until the 1990s, then more than doubled during the 1996-2007 period, and fell again to values close to 1 after the 2008 financial crisis. Sarin and Summers (2016) and Chousakos and Gorton (2017) argue that the drop in banks' market-to-book ratio since the crisis is due to a loss in bank franchise value or profitability. In this paper we argue that banks' market-to-book ratio is the sum of two components: franchise value and the value of government guarantees. We empirically decompose the ratio between these two components and find that a large portion of the variation in this ratio over time is due to changes in the value of government guarantees.

The Tail That Wags the Economy: Beliefs and Persistent Stagnation

“…33 The former falls short of the observed change -0.33% in the model versus 0.58% in the data. The fact that financial credit spreads have remained persistently high since the financial crisis has also been noted by Atkeson et al (2018): our analysis shows that belief revisions in response to the observed shocks during 2008-'09 can help explain a significant portion of this increase. 34 Spreads for non-financial firms are predicted to rise by less than that of financials.…”

“…This implicitly assumes that intermediary leverage is not too high relative to the shocks on the asset portfolio, which is not a bad approximation given our calibration of corporate default rates. While it is possible to relax this assumption and allow for default on intermediary debt even in the absence of the financial shock, Atkeson et al (2018) and Sarin and Summers (2016) argue that the post-crisis changes in bank leverage have not really led to lower risk premia. Our specification is consistent with this finding.…”

The Tail that Wags the Economy: Beliefs and Persistent Stagnation

“…This implicitly assumes that intermediary leverage is not too high relative to the shocks on the asset portfolio, which is not a bad approximation given our calibration of corporate default rates. While it is possible to relax this assumption and allow for default on intermediary debt even in the absence of the financial shock,Atkeson et al (2018) andSarin and Summers (2016) argue that the post-crisis changes in bank leverage have not really led to lower risk premia. Our specification is consistent with this finding.47 To see this, suppose an intermediary offers a contract where she receives a positive payment in the no-default state.…”

The Impacts of Strengthening Regulatory Surveillance on Bank Behavior: A Dynamic Analysis from Incomplete to Complete Enforcement of Capital Regulation in Microprudential Policy

“…) is the ex-post equity capital of the bank inspected by the regulator. If inspected, the situation can be divided into two cases, as shown in (6). If the bank satisfies the capital requirement (Φ t ≥ φ), its ex-post equity capital is the same as E N (L t ,n t ; z t+1 ).…”

“…stricter capital regulation causes financial institutions to increase measures of regulatory capital. However, such increase in regulatory capital is offset by a decline in the franchise value of the financial institutions, and thus, the banking system becomes fragile, that is, "measures of regulatory capital are flawed" (see also Atkeson et al (2018), Begenau et al…”