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RWP 22-01, January 2022

I study investor responses to the 2020 bank stress tests that included restrictions on shareholder payouts. I find that banks subject to the stress tests and payout restrictions experienced both immediate and persistently lower excess stock price returns. In the cross-section, I find that excess stock returns declined with bank size but cannot otherwise be explained by pre-pandemic bank or payout characteristics, suggesting that investors penalized banks likely to experience greater regulatory scrutiny. However, the excess stock return penalties are smaller than those previously estimated in the literature examining voluntary payout reductions that signal bank distress. The results show that using supervisory discretion to take preventative actions during a crisis is less costly than waiting to take actions when banks are distressed.

JEL Classifications: G21, G28, G35

Article Citation

  • Marsh, W. Blake. 2022. “Supervisory Stringency, Payout Restrictions, and Bank Equity Prices.” Federal Reserve Bank of Kansas City, Research Working Paper no. 22-01, January. Available at External Link


W. Blake Marsh

Senior Economist

Blake Marsh is a senior economist at the Federal Reserve Bank of Kansas City. He joined the Banking Research department in July 2016. His research areas are commercial bank regul…