Effect of Federal Reserve Policies on Bank Equity Returns
Posted: 26 Jan 2000
Abstract
We investigate the reaction of bank equity returns to changes in the relevant Federal Reserve (Fed) policy tool, which is the federal funds rate during periods of interest rate targeting and the discount rate during periods of reserves targeting. Three distinct policy periods from 1974 to 1996 are investigated. We find that bank equity returns are inversely related to changes in the relevant Fed policy tool and that the degree of sensitivity of bank equity returns is conditioned on the direction of the change in the Fed policy tool. Also, we find that values of larger banks and commercial banks with low capital ratios are more exposed to changes in the relevant Fed policy tool.
JEL Classification: G12, G14, G21
Suggested Citation: Suggested Citation