Abstract
We examine changes in banks' market-to-book ratios over the last decade, focusing on the dramatic and persistent declines witnessed during the financial crisis. The extent of the decline and its persistence cannot be explained by the delayed recognition of losses on existing financial instruments. Rather, it is declines in the values of intangibles — including customer relationships and other intangibles related to business opportunities — along with unrecognized contingent obligations that account for most of the persistent decline in market-to-book ratios. These shifts reflect a combination of changed economic circumstances (e.g., low interest rates reduce the value of core deposits; meager growth opportunities reduce the value of customer relationships) and changed regulatory policies. Together, these changes in the business environment since the financial crisis have led investors to associate little value with intangibles. For example, changing market perceptions of the consequences of leverage have affected the way investors value banks; prior to the crisis, higher leverage, ceteris paribus, was associated with greater value (reflecting the high relative cost of equity finance), but during and after the crisis, as default risk and regulatory concerns came to the fore, lower leverage was associated with greater value. Reflecting the rising importance of regulatory risks (e.g., the uncertain consequences of the Volcker Rule), after controlling for other influences, dividend payments (a signal of management and regulatory perceptions of the persistence of financial strength) matter for market prices much more after the crisis, while increases in recurring fee income matter less.