NY Fed Economists Say Media Exposure Shaped Investor Perceptions in 2023 Bank Run
Federal Reserve Bank of New York economists examined how investors perceived bank risk during the 2023 U.S. bank run.
In its Liberty Street Economics blog, the economists found that media coverage played a critical role in shaping investor perceptions during the bank run. They found that banks receiving greater press attention saw heightened investor sensitivity regardless of fundamentals. They concluded that media exposure acted as a coordination device that amplified concerns about certain banks and shaped risk perceptions as much as balance sheet vulnerabilities. The economists noted that contagion was contained because investor focus remained limited to a small group of institutions and the Federal Reserve provided liquidity support.
The economists found that vulnerabilities, such as high levels of uninsured deposits and unrealized securities losses, were evident in 2022, however, stock market investors showed little sensitivity to these risks until the crisis actually hit. The economists noted that, just as depositors appeared surprised by the speed of the March 2023 bank run, investors also failed to respond to clear warning signs until after the fact. They argued that investors only became attentive once the run began in March 2023, and even then concerns were concentrated on fewer than one-third of publicly traded banks.
In an effort to "capture" these vulnerabilities, the economists constructed new risk indicators—uninsured deposits and unrealized losses on securities—by creating portfolios of banks with high versus low exposures and calculating the return spread between them. They then measured how individual bank stock returns co-moved with these factors, producing "betas" that reveal whether investors were pricing in those risks. The economists found that before March 2023 these betas were statistically insignificant, showing that markets largely ignored the risks. They reported that once the run began, the betas turned sharply positive, meaning investors suddenly demanded higher returns for holding banks with greater exposures, even though the late-2022 balance sheet fundamentals did not predict which banks would be most affected.