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Federal Reserve Bank of Minneapolis
Staff Report
Government Guarantees and the Valuation of American Banks
Andrew Atkeson
Adrien d'Avernas
Andrea L. Eisfeldt
Pierre-Olivier Weill
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.


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Andrew Atkeson & Adrien d'Avernas & Andrea L. Eisfeldt & Pierre-Olivier Weill, Government Guarantees and the Valuation of American Banks, Federal Reserve Bank of Minneapolis, Staff Report 567, 19 Jun 2018.
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Keywords: Banking; Bank valuation; Bank financial soundness; Bank regulation; Risk shifting; Bank leverage
DOI: 10.21034/sr.567
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Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

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