A new study of investor behavior during the 2023 bank runs found that news coverage was at least as important as underlying bank fundamentals in driving investor perceptions of bank risk.
The study by researchers at the Federal Reserve Bank of New York examined investor behavior during the failures of Silicon Valley Bank and other institutions that year. As outlined in a recent Liberty Street Economics blog post, they found that when a bank appeared in the news during the crisis, investors became much more sensitive to its risks “regardless of whether the bank had a riskier balance sheet than its peers.”
“News coverage, even when stale, appeared to have served as a coordination device, helping investors focus collectively on certain banks,” they write. “These results imply that investors may be unable to quickly process information in a crisis, potentially making market price dynamics noisier, to the detriment of market participants and policymakers. However, as investor attention was focused on a few banks rather than a broad swathe of the banking sector, the contagion was contained.”
The researchers also found that the launch of the Bank Term Funding Program – a temporary liquidity program created by the Federal Reserve in response to the crisis – “substantially” reduced investor risk perceptions. The same could not be said of the Fed’s discount window, which “had no such effect.”
