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