Equity Returns in the Banking Sector in the Wake of the Great Recession and the European Sovereign Debt Crisis

Abstract

This study finds that equity returns in the banking sector in the wake of the Great Recession and the European sovereign debt crisis have been driven mainly by weak growth prospects and heightened sovereign risk and to a lesser extent, by deteriorating funding conditions and investor sentiment. While the equity return performance in the banking sector has been dismal in general, better capitalized and less leveraged banks have outperformed their peers, a finding that supports policymakers’ efforts to strengthen bank capitalization.

Keywords: Banks, Equity Returns, Sovereign Risk, Sovereign Debt Crisis, Economic Growth, Regulatory Capital, Panel Data Econometrics, Banking Sector, Credit Risk, Economic Recession, General Financial Markets

JEL Classification: G14, G21