Discussion paper

DP15901 Why did bank stocks crash during COVID-19?

We study the crash of bank stock prices during the COVID-19 pandemic. We find evidence
consistent with a “credit line drawdown channel”. Stock prices of banks with large ex-ante
exposures to undrawn credit lines as well as large ex-post gross drawdowns decline more. The
effect is attenuated for banks with higher capital buffers. These banks reduce term loan
lending, even after policy measures were implemented. We conclude that bank provision of
credit lines appears akin to writing deep out-of-the-money put options on aggregate risk; we
show how the resulting contingent leverage and stock return exposure can be incorporated
tractably into bank capital stress tests.


Acharya, V, R Engle and S Steffen (eds) (2021), “DP15901 Why did bank stocks crash during COVID-19?”, CEPR Press Discussion Paper No. 15901. https://cepr.org/publications/dp15901