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Was there a “small-bank” anomaly in the Great Crisis of 2007-09?
  • Paola Bongini
  • Giovanni Ferri
  • Punziana Lacitignola
Drawing on a large set of listed banks from Europe, the US and Japan we start noticing that smaller-sized banks suffered less than larger banks in conjunction with the unfolding of the Great Crisis of 2007-09. Was this a small-bank anomaly analogous to the classic small firm effect? We conjecture that what seems to be a small bank anomaly might, in fact, signal a generalized market reassessment of the banking business model and tested whether stock markets penalized less the banks that kept more rooted to the traditional “originate-to-hold” (OTH) model while forgoing the opportunities disclosed by the “originate-to-distribute” (OTD) model. By an event study methodology, we focus on September 29, 2008, the day in which the initial rejection by Congress of the Paulson Plan provoked a true panic on the instability of banking worldwide and led the VIX (the main index measuring equity market volatility) to shoot to the highest level in 6 years. Our results detect that, indeed, banks that had kept closer to the OTH model – as proxied by a higher net interest income/operating income – experienced less negative abnormal returns. In spite of this, we still keep finding that larger-sized banks’ share prices were penalized more than the share prices of their smaller-sized homologues. Presumably, the “Too Big (or Interconnected) To Fail” credence, at least for a while, had been overruled. We also find that European and Japanese banks experiences less negative abnormal returns.
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Paola Bongini, Giovanni Ferri and Punziana Lacitignola. "Was there a “small-bank” anomaly in the Great Crisis of 2007-09?" (2010)
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