Bank Failures 2008: An Examination of the Impact on Stockholder Risk and Wealth
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This article investigates how recent failures of seven publicly-traded commercial banks and the banking crises of 2008 affect the wealth, the systematic and nonsystematic risk, and total risk of commercial banks. We find that the total risk of medium-sized banks is slightly more affected by the turbulence in the financial sector than larger banks. The changes in wealth are positive overall and marginally significant. Taken as a whole, the results indicate that at the end of 2008, the major consequences of the bank failure events are reflected in the level of risk and in modest changes in wealth. There is some indication that investors differentiate which bank type has more exposure, which consequently increases the risk of banks with similar characteristics as the failed banks. The best hedging strategy should therefore consider the inclusion of medium-size federally chartered banks, large banks, and money centers with a state charter only. Our results imply that regulators should more closely monitor bank holding companies based on size and charter type particularly during financial turbulence.
Abstract
This article investigates how recent failures of seven publicly-traded commercial banks and the banking crises of 2008 affect the wealth, the systematic and nonsystematic risk, and total risk of commercial banks. We find that the total risk of medium-sized banks is slightly more affected by the turbulence in the financial sector than larger banks. The changes in wealth are positive overall and marginally significant. Taken as a whole, the results indicate that at the end of 2008, the major consequences of the bank failure events are reflected in the level of risk and in modest changes in wealth. There is some indication that investors differentiate which bank type has more exposure, which consequently increases the risk of banks with similar characteristics as the failed banks. The best hedging strategy should therefore consider the inclusion of medium-size federally chartered banks, large banks, and money centers with a state charter only. Our results imply that regulators should more closely monitor bank holding companies based on size and charter type particularly during financial turbulence.
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