Bank Equity Losses and Economic Impact

Severe and sudden depositor withdrawals = Withdrawals from multiple large or small banks in the country Severe strains in interbank lending = Difficulty in lending between banks Foreign-currency capital outflows = Capital leaving the banking sector in foreign exchange Panics occurrence = System-wide phenomenon involving many banks

Calomiris = Defined panic episodes based on banking system behavior Gorton = Co-authored definitions of banking panics Huang = Collaborated on the empirical mapping of panics Gorton and Huang = Expanded the definition of panic to include various withdrawals

Banking panic = System-wide event causing banks to suspend convertibility Depositor run = Individual bank facing demands beyond its capacity Non-panic distress = Episodes that do not meet panic criteria Salient funding pressures = Sudden urgent financial demands on banks

<p>Panic = Involves multiple banks with urgent cash demands Single bank run = Containment to one financial institution Withdrawals honoring = Depositors can take out large amounts without bank failure System shrinkage = Reduction of banking system volume without panic conditions</p> Signup and view all the answers

<p>Overly inclusive definition = Ensures non-panic episodes are distinguishable Definition exclusion = Single bank experiences are not classified as panics Demand for cash at par = Depositors wanting immediate liquidity for their claims Funding pressures = Emergence during periods of significant financial strain</p> Signup and view all the answers

<p>Peek and Rosengren = Japanese banks' shocks affecting U.S. and Japan Amiti and Weinstein = Effects of Japanese bank distress Khwaja and Mian = Political event in Pakistan affecting bank credit Chodorow-Reich = Lehman bankruptcy during the Great Recession</p> Signup and view all the answers

<p>Bank equity decline = Indicator of banking distress Banking panic = Investor loss of confidence leading to withdrawals Credit supply shock = Reduction in available credit due to a significant event Regulatory forbearance = Limited enforcement of regulations on banks</p> Signup and view all the answers

<p>Peek and Rosengren = Macro-economic effects of Japanese banking shocks Chodorow-Reich = U.S. employment effects post-Lehman bankruptcy Huber = Domestic lending cuts by Commerzbank Khwaja and Mian = Bank credit effects due to a political event</p> Signup and view all the answers

<p>Banking crises with panics = Severe economic consequences often observed Banking crises without panics = Can occur due to undercapitalization Large bank equity declines = Necessary for a banking crisis to occur Empirical performance of bank equity declines = Measure of banking distress</p> Signup and view all the answers

<p>Khwaja and Mian = 2008 Chodorow-Reich = 2014 Huber = 2018 Peek and Rosengren = 2000</p> Signup and view all the answers

<p>Adverse macroeconomic consequences = Results from bank equity declines Large losses = Often captured by bank equity prices Government interventions = Prevent panics in undercapitalized banks Implicit creditor guarantees = Support troubled banks without a panic</p> Signup and view all the answers

<p>Lehman bankruptcy = Exploited for U.S. employment studies Shocks from Japanese banks = Used for macroeconomic consequence analysis Bank credit supply shock = Analyzed due to political event Domestic lending cuts = Studied through Commerzbank's experiences</p> Signup and view all the answers

<p>Sharp identification = Analyzing specific banking shocks Macroeconomic consequences = Broader effects of bank distress Measurement error = Potential misclassifications in banking crises Bank equity prices = Reflecting perceptions of banking stability</p> Signup and view all the answers

<p>Panics without bank equity crashes = Minor financial disturbances that do not lead to significant long-term economic damage Anticipated panics = Expectations of financial distress that may not materialize Bank equity declines = Situations where a bank's financial value decreases without panic events Clear-cut panic episodes = Severe financial events typically accompanied by immediate equity crashes</p> Signup and view all the answers

<p>Non-panic bank equity crash = 2.8% lower output Panic bank equity crash = 4.9% lower output Panic episodes without bank equity crash = No specific output impact mentioned Panic episodes with bank equity crashes = Higher output decline than non-panic</p> Signup and view all the answers

<p>Calomiris = Most pre-Great-Depression panics driven by small shocks Gertler and Kiyotaki = Low output in non-panic bank equity crash episodes may anticipate panics The author of the content = Bias in narrative chronologies towards salient panics State mention = Government guarantees may reduce the perceived risk of panics</p> Signup and view all the answers

<p>Isolated creditor runs = Potential for temporary confusion among depositors Minor panics = May be over-represented in historical recountings Bank funding costs = Can rise in anticipation of panics Banking distress = Linked to negative macroeconomic consequences</p> Signup and view all the answers

<p>Fundamental uncertainty = About two-thirds of withdrawals Strategic uncertainty = Sharp increases in withdrawals Panic = Year of a crash or surrounding years Non-panic bank equity crashes = Equity market 'noise' concern</p> Signup and view all the answers

<p>Non-panic bank equity crash episodes = 109 episodes Panic episodes without a bank equity crash = 67 episodes Panic episodes with bank equity crashes = 34 episodes Total number of panic-related episodes = Sum of panic and non-panic episodes</p> Signup and view all the answers

<p>Narrative chronologies = May underestimate severe banking crisis costs Temporary confusion = Often occurs during minor panics Salient panics = Receive more attention despite mild economic impact Equity crashes = Typically correlate with severe banking consequences</p> Signup and view all the answers

<p>Lower output from non-panic crashes = 3.4% lower credit-to-GDP Panic bank equity crashes = 9.1% lower credit-to-GDP Non-panic crashes = Statistically significant estimates Panic-related episodes = Stronger impacts on credit constraints</p> Signup and view all the answers

<p>Temporary confusion of depositors = Does not lead to long-lasting damage Difficulty of detection in bank equity declines = Results in under-representation in historical records Anticipated panics as a model prediction = Indicates possible rise in bank costs Finer classification of panics = Aims to improve accuracy of impact assessment</p> Signup and view all the answers

<p>Minor panics = Do not typically result in bank equity declines Severe solvency concerns = Can lead to underestimated banking crisis costs Explicit government guarantees = Reduce creditor's perceived risk of panic Adverse macroeconomic outcomes = Can occur without the presence of panics</p> Signup and view all the answers

<p>Value of 1 in crash year = When there is a panic Value of 1 in non-crash year = Just in the year of panic Surrounding years = Panic and crash may not be contemporaneous Value of 0 = In the absence of panic or crash</p> Signup and view all the answers

<p>Mild macroeconomic consequences = Associated with minor panics without equity crashes Under-representation of bank equity crashes = Caused by challenges in detection Resulting bias in narratives = Leads to misperceptions about banking crises Funding costs rising = Connected to anticipated but non-occurring panics</p> Signup and view all the answers

<p>Deep recessions = Associated with panic bank equity crashes Persistently tight credit conditions = Worse than non-panic episodes Equity market 'noise' = Concerns during non-panic crashes Statistically significant = Output impacts after three years</p> Signup and view all the answers

<p>Low output = May reflect anticipated panics that do not occur Increased bank net worth = Typically not associated with anticipated panics Safety of distressed banks = Influenced by government guarantees Inconclusive panic episodes = May include borderline events affecting narrative analysis</p> Signup and view all the answers

<p>Non-panic crashes = 3.4% lower credit-to-GDP Panic episodes = Stronger output decline Panic crashes = Higher associated impacts Bank equity crashes = Allow identifying banking sector distress</p> Signup and view all the answers

<p>Fundamental uncertainty = Caused sharp increases in withdrawals Strategic uncertainty = Influenced depositor behaviors Non-panic crashes = Concern might not reflect banking impairment Panic = Indicated a crisis event unrelated to economic fundamentals</p> Signup and view all the answers

<p>Bank equity crash = Decline of 30% from previous peak First panic episode = Occurs after bank equity crash Average months until panic = 7.5 months after equity crash Percentage of panics following crashes = 74% of crises</p> Signup and view all the answers

<p>P-value = Indicates significance of event order Bernoulli-distributed hypothesis = Tests if crash happens before panic Statistically significant difference = More often crashes precede panics Non-trivial proportion of losses = Indicates early stages of crisis losses</p> Signup and view all the answers

<p>36% = Average decline before panic occurs 55% = Percentage of total decline before panic 30% = Threshold for defining bank equity crash 20% = Percentage of panics occurring before crashes</p> Signup and view all the answers

<p>Gorton (1988) = Panics during U.S. National Banking Era BVX Crisis List = List of banking crises studied National Banking Era = 1863-1914 time frame NBER business cycle peaks = Timing related to panic occurrences</p> Signup and view all the answers

<p>Bank equity investors = Realize large losses pre-panic Panic phase = Final extreme stage of crisis Crisis detection = Identified by bank equity decline Equity crash precedence = Typically occurs before the panic</p> Signup and view all the answers

<p>Timing of crashes and panics = Shows a consistent delay of panic Impact of lost equity = Investors suffer before panic hits Statistical significance of findings = Supports theories of early losses Distribution of equity declines = Illustrates severity of financial panic</p> Signup and view all the answers

<p>Percentage before panic = 55% of eventual decline Panic occurrences before crashes = 20% of cases Crises with panics data = 74% show crashes preceding panics Average decline from peak = 36% before panic</p> Signup and view all the answers

<p>Null hypothesis = Testing event order Cumulative decline = 30% for defining crashes Episodes with panics = Analyzed in crisis studies Origins of panic = After substantial equity losses</p> Signup and view all the answers