Discussion paper

DP15901 Why did bank stocks crash during COVID-19?

A two-sided "credit-line channel" – relating to drawdowns and repayments – explains the severe
drop and partial subsequent recovery in bank stock prices during the COVID-19 pandemic.
Banks with greater exposure to undrawn credit lines saw larger stock price declines but
performed better before the pandemic and after the policy interventions. Despite deposit
inflows, high drawdowns led to reduced bank lending, suggestive of capital encumbrance upon
drawdowns. Repayments of credit lines unencumbered capital which explains the stock price
recovery starting Q2 2020. Bank provision of credit lines resembles writing deep out-of-themoney
put options on aggregate risk, and we propose how to incorporate this feature into bank
capital stress tests.


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