While the banking sector index depicts the general trend in bank equity prices, it is silent about the drivers of their performance. Understanding these drivers is important for equity market investors, bank managers and prudential regulators alike. For investors, a better understanding would inform portfolio decisions. For bank managers, the expected rate of return on shareholders’ funds represents a key hurdle rate for business decisions. For policymakers, it would shed light on the incentives of bank shareholders and, by extension, bank managers. Furthermore, insight into the determinants of bank equity prices can also inform the calibration of policies.
