Bank Leverage Dynamics and Bank Valuations

Dear Colleagues,

Recent developments in banking regulation, business structure, negative interest rates and technology have significantly altered bank behavior and possibly the determinants of bank valuations. They may also have had a profound impact on the modes bank choose to adjust their balance sheets to meet capital standards and attain profitability targets in the short and long run. Certain forms of balance sheet adjustments could be suboptimal from a social and even private perspective if they focus solely on shareholder interests at the detriment of value of the bank as a whole. For example, borrower–creditor conflicts could lead banks to cut down aggressively on new lending or do fire sales in order to delever, instead of issuing new equity, or levering up through excessive capital distributions to shareholders instead of funding good projects. Despite the growing literature on bank leverage dynamics and bank valuation, important empirical questions remain open:

• How do bank leverage dynamics affect bank charter value and profitability in the short and long term?
• What is the impact of tighter capital standards on bank charter value and profitability? Does capital regulation enhance charter value by making banks safer and reducing the deadweight costs of distress, or could this accelerate failure by reducing profitability and stifling shareholder incentives to voluntarily recapitalize banks?
• How do banks effect leverage adjustments on their balance sheet? To what extent are banks’ choices over the mode of leverage adjustment affected by asset riskiness, asset diversification, debt structure (e.g., customer deposits vs. wholesale based), asset market conditions, or corporate governance characteristics?
• How do negative (or very low) interest rates impact on bank valuations and leverage decisions?
• How does regulatory forbearance affect bank charter value, especially in view of extraordinary measures to loosen regulatory capital constraints and suspend loan provision rules under IFRS 9 following COVID-19?

This Special Issue will focus on these topics.

Prof. Dr. Plutarchos Sakellaris
Guest Editor

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• Bank leverage dynamics
• Bank valuation
• Bank profitability
• Regulatory forbearance
• Loan loss provision
• Borrower-creditor conflicts