Equity returns in the banking sector in the wake of the Great Recession and the European sovereign debt crisis

• The paper analyzes the impact of sovereign risk, economic growth prospect, and funding conditions on equity performances.
• It finds that equity returns have reflected mainly weak growth prospects and large exposure to peripheral bonds.
• Banks with better capitalization, lower leverage and low reliance on short-term wholesale funding is likely to outperform.

This study finds that equity returns in the banking sector in the wake of the Great Recession and the European sovereign debt crisis have been driven mainly by weak growth prospects and heightened sovereign risk; and to a lesser extent by deteriorating funding conditions and investor sentiment. While the equity return performance in the banking sector has been dismal in general, there is some evidence that better capitalized and less leveraged banks have outperformed their peers in times of stress.