Bank Stock Prices

Bank Stock Prices Discussion by: Philip E. Strahan Boston College September 2006 Research Questions Furlong & Kwan: What drives the level of bank stock prices (market-to-book)? Schuermann & Stiroh: What drives variation in bank stock prices? What is correlated with the level of bank stock prices? Market trends – Bank MTB rose in the 1990s Bank characteristics – Core deposits (++) – Efficiency = Revenues / Expenses (++) – Non-interest income share (++, large banks) – Loan shares (??) – Log of assets (??) Strong claims “rebound in bank charter values suggests that … banks remain special” “negative effect of size on relative charter value…would be consistent with policy measures having reduced market‟s expectations for TBTF rescues…” “provision of core deposit services contributes to charter value ratios…” “the market apparently has seen the reliance on fee-based activities as a positive development” How do you interpret these regression? Bank size and stock prices (CV) – TBTF banks will have high stock prices – Large banks may be more or less efficient – High CV banks will grow – High CV banks will buy low CV banks – High CV (e.g. Tobin‟s Q > 1) will lead to capacity expansion in the industry How do you interpret these regression? Lending activity & stock prices – Are C&I loan markets competitive – Or, do banks with high CV avoid risky business loans? Non-interest income share – Levels (MTB) v. returns Efficiency (revenue per $ of expenses) – What makes banks have efficient? Suggestions for Furlong & Kwan Soft-pedal some claims – Paper has no identification strategy to sort our casuality Decompose results into cross-sectional and time-series dimensions – Between v. firm fixed effects results Report / discuss sample properties – e.g. how do you handle M&A? Cluster residuals at bank-level for more conservative statistical tests What is correlated with variation in bank stock prices? Market factor dominates Residual correlation remains, even with 9factor model Bank returns more correlated to market than other firms Large bank betas >> small bank betas Residual correlation for large banks >> for small Questions What is the role of credit, interest rate and liquidity risks? – Less true for small banks – Estimate models with just credit, interest rate and liquidity factors Is residual cross-bank correlation large or small? Suggestions for Schuermann & Stiroh Focus on issue of systemic risk – What happens to factor loadings during „events‟? – What happens to residual correlation across banks during events? Why are large bank returns so much more systematic? – Incentives (exploit variation in TBTF over time) – Clients (large v. small borrowers) – Product difference (derivatives; off-balance sheet commitments; loan portfolios) Is MTB ratio (still) correlated with stock-market variation? Systematic (beta) Idiosyncratic Residual correlation (or, loading on bankfactor)