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Government Guarantees and the Valuation of American Banks

Andrew G. Atkeson, Adrien d'Avernas, Andrea L. Eisfeldt, Pierre-Olivier Weill

NBER Working Paper No. 24706
Issued in June 2018
NBER Program(s):Asset Pricing, International Finance and Macroeconomics, Monetary Economics

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.

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Document Object Identifier (DOI): 10.3386/w24706

Forthcoming: Government Guarantees and the Valuation of American Banks, Andrew G. Atkeson, Adrien d'Avernas, Andrea L. Eisfeldt, Pierre-Olivier Weill. in NBER Macroeconomics Annual 2018, volume 33, Eichenbaum and Parker. 2018

 
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