BIS国际清算银行-Effects-of-Covid-19-on-the-banking-sector_-the-markets-assessment_9页_763kb

BIS Bulletin No 12: Effects of Covid-19 on the Banking Sector – The Market's Assessment

Core Content

This BIS Bulletin analyzes the impact of the Covid-19 pandemic on the banking sector, focusing on how markets have assessed banks' performance in terms of equity prices, credit default swap (CDS) spreads, bond spreads, and credit ratings. The study compares the market reactions to the pandemic with those experienced during the 2008 financial crisis, highlighting both similarities and differences in how banks have been affected.

Key Takeaways

• Banks' performance on equity and debt markets since the outbreak of Covid-19 has been similar to the aftermath of the 2008 Lehman Brothers collapse.
• Market sell-off initially affected all banks, but differentiation emerged based on bank nationality and pre-pandemic credit risk.
• CDS spreads increased most for banks with the highest credit risk, even during the stabilisation phase.
• Policy measures introduced in mid-March, such as the ECB's Pandemic Emergency Purchase Programme (PEPP) and the Fed's actions, contributed to a partial recovery in bank prices and funding conditions.
• Less profitable banks saw their long-term rating outlooks revised to negative, indicating a growing concern over their financial stability.
• CoCo debt spreads increased significantly, but not disproportionately compared to other debt instruments, due to the dividend restrictions introduced by authorities to preserve bank capital.

Market Reactions Across Banks

• Chinese banks were relatively less affected by the initial market sell-off, likely due to strong liquidity support from the People's Bank of China.
• Emerging market (EM) banks, particularly those in OEM (Other Emerging Markets), experienced the largest increases in CDS spreads, reflecting heightened risk perceptions.
• CDS markets showed a clear penalty for lower-rated banks, with spreads rising more for those with high-yield ratings.
• Equity markets did not differentiate between banks based on their pre-Covid-19 credit ratings, suggesting that investors were more concerned with overall performance outlooks rather than specific credit ratings.

Bank Characteristics and Market Performance

• Well-capitalised banks saw a stronger recovery in stock prices and lower increases in CDS spreads during the stabilisation phase.
• Profitability and reliance on short-term funding were key differentiators in the CDS market. More profitable banks experienced greater declines in CDS spreads, while those with higher short-term funding reliance saw larger increases.
• European banks have historically had lower profitability compared to banks in other regions, which has been a major concern during the pandemic.
• Credit rating outlooks for European banks were more likely to be revised downward, with over three quarters of the sample receiving negative outlooks.

Bank Ratings and Market Prices

• Stock prices fell similarly across all rating categories, indicating that investors were more focused on general performance than specific credit ratings.
• CDS spreads were more sensitive to credit ratings, with lower-rated banks experiencing greater increases in spreads.
• Fitch downgraded 11 banks during the period from March to April 2020, signaling a shift in credit risk perceptions.

Conclusion

The Covid-19 crisis has had a significant and widespread impact on the banking sector, comparable in scale to the 2007–09 financial crisis. While initial market reactions were indiscriminate, subsequent policy measures led to greater differentiation among banks, with stronger balance sheets and profitability being key factors in market recovery. Despite a partial price recovery in late April, funding conditions remain tight, and long-term rating outlooks have been revised to negative for many banks, especially those with low profitability. As the financial health of borrowers continues to deteriorate, more downgrades are expected in the coming months.

Key Information

• Equity and debt markets showed similar patterns of decline and recovery.
• Policy measures by central banks played a crucial role in stabilising markets.
• CoCo debt responded to market stress but not more than other debt instruments due to dividend restrictions.
• Market differentiation became more pronounced as the crisis progressed, with capitalisation and profitability being strong indicators.
• European banks faced more severe rating downgrades, reflecting chronic profitability issues.
• CDS spreads were more sensitive to credit risk, with lower-rated banks suffering the most.
• Credit ratings are starting to reflect market concerns, with more downgrades expected.

References

• Avdjiev, S, A Kartasheva, B Bogdanova, P Bolton and W Jiang (2020): "CoCo issuance and bank fragility", Journal of Financial Economics, forthcoming.
• Bogdanova, B, I Fender and E Takáts (2018): "The ABCs of bank PBRs", BIS Quarterly Review, March.
• Drehmann, M, M Farag, N Tarashev and K Tsatsaronis (2020): "Buffering Covid-19 losses – the role of prudential policy", BIS Bulletin, no 9, April.