Unveiling investor preferences: an empirical study of the 2023 U. S. banking crisis

Abstract

This study investigates the U.S. Banking Crisis of 2023, exploring investor preferences through market reaction. The Fama-French 3-factors prove robust in explaining bank returns during the crisis. Adding the change in U.S. deposits to the FF3-model improves its ability to explain bank returns and highlights that deposit outflows, especially for regional banks, represent a systematic risk. Regression analyses identify crucial factors such as size, liquidity, staff-expenses, leverage, and business-model influencing idiosyncratic risk. Long/short portfolios confirm these factors and show that investors preferred larger banks, stronger liquidity positions, lower staff-expenses, lower leverage, and simpler, less risky business models during the crisis.