Finance and Economics Discussion Series (FEDS)
September 2025
Pricing Tail Risks: Bank Equity Returns During the 2023 Bank Stress
Matthew P. Seay and Shawn M. Kimble
Abstract:
Did bank equity prices reflect growing sector imbalances before the 2023 failure of Silicon Valley Bank? We find that banks with higher reliance on uninsured deposits, or with higher marked-to-market leverage, had lower equity returns prior to SVB's collapse. Although markets priced uninsured deposits and high leverage individually, their interaction was not reflected in market prices prior to SVB’s failure. Post-SVB, banks with less ability to meet outflows without severely depleting capital, and banks with too little useable liquidity relative to runnable funding, experienced larger stock price declines, beyond what other fundamentals and business model risks explain. In addition, we highlight evidence of feedback between equity prices and balance sheet management: banks with lower returns in 2023:Q1 were more likely to rely heavily on reciprocal deposits by 2023:Q2.
Keywords: Financial Institutions, Bank Capital, Interest Rate Risk, Liquidity
DOI: https://doi.org/10.17016/FEDS.2025.078
PDF: Full Paper
Related Materials: Accessible materials (.zip)
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