This paper assesses the market response to bank rescue packages announced in October 2008 in six countries. Government interventions benefited creditors at the expense of shareholders, with bank CDS spreads narrowing around the announcements in all cases.
This paper assesses the market response to bank rescue packages announced in October 2008 in six countries. It measures the market reaction of bank CDS spreads and stock prices for 52 banks using an event study methodology, which provides a measure of the wealth transfer between shareholders and creditors.
The rescue packages were designed to avoid the default of systemically important banks while restoring confidence in the financial system and ultimately restarting the flow of credit to support the real economy. With these objectives in mind, the report focuses on the 50 trading days before and after the announcement in each country.
Government interventions benefited creditors at the expense of shareholders, with the average bank CDS spreads for each country narrowing around the announcements in all cases. Despite a brief positive reaction, bank stock prices continued to underperform in all countries except the United States where the generous terms of the government support allowed bank stocks to outperform the market. Stock prices of banks receiving direct government support do worse than banks not receiving government capital, suggesting this support provided a negative signal to shareholders.
The cross-country response of stock prices highlights the relative attractiveness of government support. In particular the stock market response reflected the type of capital injected, the conditions attached to this capital and the protection offered to common shareholders. In contrast to the European experience, the US rescue packages were well received by both creditors and shareholders.
The October rescue packages provided governments with time to assess the situation and formulate their policy responses. At the same time, these policy interventions did not represent a buying opportunity as seen in the underperformance of bank stocks in most countries studied.
© BIS - Bank for International Settlements
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