EU banks after the crisis: sinners in the hands of angry markets

Abstract

European Union banks were severely hit by the global fi nancial crisis in 2008 and their stock prices and returns have generally not recovered since then, differently to what has been observed in other sectors (i.e., non-fi nancial corporations) and jurisdictions (i.e., US). In this paper, we focus on three episodes of fi nancial turmoil in EU fi nancial markets occurring after the global fi nancial crisis (August 2015, December 2015 and January 2016, and June 2016) and, through a series of linear regressions, with and without control variables, attempt to determine the common features of those banks which stock returns declined the most. Results of the regressions tend to suggest that size has been driving the decreases in stock returns in the three episodes. Regarding asset quality, the Texas ratio has been a decisive factor in the evolution of stock returns of EU banks in the second and third periods. Interestingly, profi tability variables seem not to be statistically signifi cant to explain the declines in stock returns, except in the third period, but only under some specifi cations. An evolution on the perception by fi nancial market participants on EU banks, with a larger importance on asset quality in the latter periods, can also be observed. Lastly, on the basis of these results, further policy actions would be needed to clean-up the balance sheet of banks, as a necessary step towards full recovery after the global fi nancial crisis.

Keywords

• european banks
• stock returns
• asset quality
• global financial crisis
• profitability