The Stock Market Crisis Is Not the Same for All Banks

Between July 2007 and December 2008 banks all over the world registered the worst stock performances since the Great Depression. But the bloodbath was not the same for everyone and, to a certain point, the market discriminated between institutions, argue Andrea Beltratti from Università Bocconi and René Stulz from Ohio State University in Why Did Some Banks Perform Better During the Credit Crisis? A Cross-Country Study of the Impact of Governance and Regulation. Analyzing balance sheets from 98 banks with assets greater than 50 billion dollars at the end of 2006 from all over the world, the two scholars noted in particular a strong inverse correlation between 2006 performance and performance during the crisis: the market heavily punished institutions which, having taken on more risk, had obtained better results in previous years.
Even with general negativity, stock performance at various institutions during the crisis reveals very considerable variations. The researchers divided the sample into four groups: the worst registered a terrible -87.44% between July 2007 and December 2008, while the best limited damages to a more tolerable -16.58%. However, the banks with the worst results had obtained a performance of 33.07% in 2006, while those with the best results during the crisis were limited to +7.80%.
Even if the banking governance and regulation mentioned in the paper's title conditioned the results during the year and a half of crisis, their influence is less than that of balance sheet data and institution profitability in 2006. In addition, the connection between different variables is not always intuitive.
Regulation and control, in any case, count. "If we compare banks with performance in the superior quartile with banks in the inferior quartile, we observe that banks with the best results are subject to greater restriction on activity, tighter controls on banking capital and more independent authority of control," write the two authors. More authority of control, however, results in worse performance during a crisis. With each probability, note Beltratti and Stulz, the power of authority creates the imposition of tighter rules that punished performance after the outbreak of the crisis, without the same severity being applied before.
The study confirms that banks with more capital and more stable forms of financing better withstand times of crisis. The proportion of quality capital (Tier 1) and the weight of deposits on financing have positive influence on results.
In a seemingly paradoxical way, banks with a governance structure that is more supportive to stockholders are those that obtained worse results. Beltratti and Stulz explain this by observing that the closeness of stockholders resulted in greater distributions of profits and better results in 2006 and institutions rewarded by the market in previous years are those which were penalized more during the year and a half of crisis.
Lastly, the two authors repeat the same survey for the month following the bankruptcy of Lehman Brothers, a period of general panic, in which the prevalence of episodes of contagion and indiscriminate sales would be expected. Instead, even in the worst month of the crisis the market discriminated along the same lines described for the longer period between July 2007 and December 2008, even if it was minimized and had less performance differences between different bank categories.