Government Guarantees and the Valuation of American Banks
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.
All errors are ours. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Andrea L. Eisfeldt
I have a long-term consulting relationship with AQR.
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. 2019