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Government Guarantees and the Valuation of American Banks

Staff Report 567 | Published June 18, 2018

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Authors

Adrien d'Avernas

Andrea L. Eisfeldt

Pierre-Olivier Weill

Government Guarantees and the Valuation of American Banks

Abstract

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.

DOI: https://doi.org/10.21034/sr.567


Published In: NBER Macroeconomics Annual 2018 (Vol. 33, 2018, pp. 81-145) https://doi.org/10.1086/700893

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