What Explains the Crash of Bank Stock Prices During COVID-19?

We provide evidence consistent with a “credit-line drawdown channel” to explain the large and persistent crash of bank stock prices during the COVID-19 pandemic. Stock prices of banks with large ex-ante exposures to undrawn credit lines and large ex-post gross drawdowns declined more, especially of banks with weaker capital buffers. These banks reduced new lending, even after stabilization policies and even if drawdowns were accompanied by deposit inflows. Bank provision of credit lines appears akin to writing deep out-of-the-money put options on aggregate risk; we show how the resulting risks can be incorporated tractably into bank capital stress tests.