The silicon valley bank collapse, deposit insurance concentration, and stock market returns
Vol 8, Issue 12, 2024
VIEWS - 43 (Abstract) 28 (PDF)
Abstract
In this study, we explore the impact of contemporary bank run incidents on stock market performance, taking into consideration insured deposit concentration. Specifically, we use data from the recent downfall of the Silicon Valley Bank (SVB). By employing event study methods with the mean-adjusted return model and market models, we evaluate the cumulative abnormal returns (CARs). Our findings reveal a substantial negative CAR for all the listed companies in our sample, suggesting that the SVB crisis adversely affected stock returns. Further analysis shows an even more pronounced effect on the banking sector and that banks with a high concentration of insured deposits experienced economically and statistically less negative CARs. We also find that the response by the Treasury Department, the Federal Reserve, the Federal Deposit Insurance Corporation, and other agencies—aimed at fully safeguard all depositors—led a rebound in CARs. Our results highlight the importance of deposit insurance policy and regulatory responses in protecting the financial system during panic events.
Keywords
Full Text:
PDFReferences
Aharon, D. Y., Ali, S., & Naved, M. (2023). Too big to fail: The aftermath of Silicon Valley Bank (SVB) collapse and its impact on financial markets. Research in International Business and Finance, 66, 102036
Akhtaruzzaman, M., Boubaker, S., & Goodell, J. W. (2023). Did the collapse of Silicon Valley Bank catalyze financial contagion?. Finance Research Letters, 56, 104082.
Ali, S., Naveed, M., Gubareva, M., & Vo, X. V. (2024). Reputational contagion from the Silicon Valley Bank debacle. Research in International Business and Finance, 69, 102275.
Allen, F., & Gale, D. (2000). Financial contagion. Journal of Political Economy, 108(1), 1-33.
Al-Sowaidi, A. S. S., & Faour, A. M. (2023). Causes and Consequences of the Silicon Valley Bank Collapse: Examining the Interplay Between Management Missteps and the Federal Reserve’s Floundering Decisions. Journal of World Economic Research, 12(1), 38-46.
Al-Thaqeb, S. A., & Algharabali, B. G. (2019). Economic policy uncertainty: A literature review. The Journal of Economic Asymmetries, 20, e00133.
Al‐Thaqeb, S. A., Algharabali, B. G., & Alabdulghafour, K. T. (2022). The pandemic and economic policy uncertainty. International Journal of Finance & Economics, 27(3), 2784-2794.
Bales, S., & Burghof, H. P. (2024). Public attention, sentiment and the default of Silicon Valley Bank. The North American Journal of Economics and Finance, 69, 102026.
Barros, C. P. & Gil-Alana, L. A. (2009). Stock market returns and terrorist violence: Evidence from the Basque Country. Applied Economics Letters, 6(15), 1575–1579.
Bianchi, F. (2020). The great depression and the great recession: A view from financial markets. Journal of Monetary Economics, 114, 240-261.
Brown, S. & Warner, J. (1985). Using daily stock returns: The case of event studies. Journal of Financial Economics, 14(1), 3–31.
Calomiris, C. W. & Kahn, C. M. (1991). The role of demandable debt in structuring optimal banking arrangements. American Economic Review, 81(3), 497–513.
Choi, D. B., Goldsmith-Pinkham, P., & Yorulmazer, T. (2023). Contagion effects of the silicon valley bank run (No. w31772). National Bureau of Economic Research.
CNN Com Wire Service (2023). How did Silicon Valley Bank collapse in 48 hours? Here’s a timeline. Source: The Mercury News. https://www.mercurynews.com/2023/03/11/how-does-a-bank-collapse-in-48-hours-a-timeline-of-the-svb-fall/
Dangol, J. (2008). Unanticipated political events and stock returns: An event study. Economic Review, 20, 86–110.
Demirgüç-Kunt, A. & Detragiache, E. (2002). Does deposit insurance increase banking system stability? An empirical investigation. Journal of Monetary Economics, 49(7), 1373–1406.
Diamond, D. W. & Dybvig, P. H. (1983). Bank runs, deposit insurance, and liquidity. Journal of Political Economy, 91(3), 401–419.
Dodd, P. & Warner, J. B. (1983). On corporate governance: A study of proxy contests. Journal of Financial Economics, 11(1–4), 401–438.
Erer, E., & Erer, D. (2024). The domino effect of silicon valley Bank’s bankruptcy and the role of FED’s monetary policy. Borsa Istanbul Review, 24(3), 573-591.
FDIC (2023). Joint statement by the Department of the Treasury, Federal Reserve, and FDIC. Press Release. https://www.fdic.gov/news/press-releases/2023/
Flannery, M. J. (1998). Using market information in prudential bank supervision: A review of the U.S. empirical evidence. Journal of Money, Credit & Banking, 30(3), 273–305.
Galati, L., & Capalbo, F. (2024). Silicon Valley Bank bankruptcy and stablecoins stability. International Review of Financial Analysis, 91, 103001.
Gul, T. G., Hussain, A. H., Bangash, S. B. & Khattak, S. W. K. (2010). Impact of terrorism on financial markets of Pakistan (2006–2008). European Journal of Social Sciences, 18(1), 98–108.
He, Y., Nielsson, U. & Wang, Y. (2017). Hurting without hitting: The economic cost of political tension. Journal of International Financial Markets, Institutions & Money, 51, 106–124.
Iyer, R. & Puri, M. (2012). Understanding bank runs: The importance of depositor-bank relationships and networks. American Economic Review, 102(4), 1414–1445.
Iyer, R., & Peydro, J. L. (2011). Interbank contagion at work: Evidence from a natural experiment. The Review of Financial Studies, 24(4), 1337-1377.
Johnson, M. & Mamun, A. (2014). The failure of Lehman Brothers and its impact on other financial institutions. Applied Financial Economics, 22(5), 375–385.
Johnston, R. B. & Nedelescu, O. M. (2006). The impact of terrorism on financial markets. Journal of Financial Crime, 13(1), 7–25.
Kolaric, S. & Schiereck, D. (2016). Are stock markets efficient in the face of fear? Evidence from the terrorist attacks in Paris and Brussels. Finance Research Letters, 18, 306–310.
Liu, X., Megginson, W., Tran, N., & Wei, S. (2024). Who Loses Most When Big Banks Suddenly Fail? Evidence from Silicon Valley Bank Collapse. Finance Research Letters, 59, 104806.
Martins, A. M. (2023). Stock market effects of silicon valley bank and credit suisse failure: evidence for a sample of european listed banks. Finance Research Letters, 58, 104296.
Martins, A. M. (2024). The collapse of Silicon Valley Bank and Credit Suisse and their impact on other US Banks. Applied Economics Letters, 1-5.
McKay, P., & Seale, C. (2000). FDIC (Federal Deposit Insurance Corporation). Journal of Business & Finance Librarianship, 5(3), 63-73.
Pandey, D. K., Hassan, M. K., Kumari, V. and Hasan, R. (2023) Repercussions of the silicon valley bank collapse on global stock markets. Finance Research Letters, 55, 104013
Peavy, J. & Hempel, G. (1988). The Penn Square Bank failure: Effect on commercial banks security returns. Journal of Banking & Finance, 12(1), 141–150.
Raddant, M., & Kenett, D. Y. (2021). Interconnectedness in the global financial market. Journal of International Money and Finance, 110, 102280.
Radelet, S., & Sachs, J. (2000). Lessons from the Asian financial crisis. Global Financial Crises and Reforms (pp. 319-340). Routledge.
Reuters (2023). Reactions to Silicon Valley Bank meltdown. https://www.reuters.com/business/finance/global-markets-banks-instant-view-2023-03-10/
Rojas-Suarez, L. (2023). The fall of Silicon Valley Bank: A warning for emerging markets. Source: Center for Global Development. https://www.cgdev.org/publication/fall-silicon-valley-bank-warning-emerging-markets.
Valinsky, J. (2023). Silicon Valley Bank’s former parent company has filed for bankruptcy protection. Source: CNN. https://edition.cnn.com/2023/03/17/business/svb-financial-bankruptcy/index.html#:~:text=SVB%20Financial%20Group%2C%20the%20company,in%20New%20York%20on%20Friday.
Van Vo, L., & Le, H. T. T. (2023). From hero to zero: The case of Silicon Valley Bank. Journal of Economics and Business, 127, 106138.
Yorulmazer, T. (2009). Liquidity bank runs and bailouts: Spillover effects during the Northern Rock episode. Federal Reserve Bank of New York. Available at SSRN https://ssrn.com/abstract=1107570.
Yousaf, I., & Goodell, J. W. (2023). Responses of US equity market sectors to the Silicon Valley Bank implosion. Finance Research Letters, 55, 103934.
DOI: https://doi.org/10.24294/jipd.v8i12.9104
Refbacks
- There are currently no refbacks.
Copyright (c) 2024 Abdullah M. Al-Awadhi, Saad Alnahedh, Ahmad Bash
License URL: https://creativecommons.org/licenses/by/4.0/
This site is licensed under a Creative Commons Attribution 4.0 International License.