Macroeconomic Forces and Their Effects on the Swedish Banking Sector

Abstract

After the bankruptcy of Lehman Brothers in September 2008 international capital markets trembled of uncertainty and investors did not know where the markets were heading. The market turmoil also had an impact on Sweden and especially on the banking sector due to the interdependence of international financial markets. Some Swedish banks were granted support through a guarantee program that was offered by the Swedish government. The Swedish banking sector is relatively unique in an international comparison when looking at the degree of market concentration. Four large banks, “The Big Four”, dominate the market and have a market share of more than 80%. These are Swedbank, SEB, Nordea and Handelsbanken. The purpose of this thesis was to investigate to what extent a set of macroeconomic factors presented on a daily basis could be used to explain the stock performance of these banks before and after the crash of Lehman Brothers by comparing similarities and differences between the four banks. The macroeconomic factors whose impact were analysed were changes in CDS-spreads as a proxy for default risk, Swedish T-bills, the Stockholm OMX 30 Index, the SEK/Euro exchange rate, the Amihud illiquidity measure as a proxy for growth in industrial production, Swedish term structure of interest rates and unanticipated changes in oil price. The empirical work was done by constructing an econometrical multifactor model by using daily data for the variables over the years 2005-2012 where adjustments to data issues such as heteroskedasticity and autocorrelation were made by using Newey-West estimators. The results showed that there were both differences and similarities in the impact of the macroeconomic factors on the four bank stocks. Swedbank and SEB were clearly more affected by changes in CDS-spreads than for example Handelsbanken even though the statistical significance fell after the Lehman Brothers crash. The reason for this might be that the risk exposure of the banks changed after the crash. In the cases where changes in the SEK/Euro were statistically significant it affected stock returns negatively. The reason for this might be the higher borrowing costs when borrowing in Euro. Handelsbanken distinguished themselves from the others and was the only bank for which changes in T-bills had a positive correlation with stock returns after the crash. This suggests that the market viewed the Handelsbanken stock as a substitute for Swedish T-bills after the crash with lower risk than the other bank stocks. In addition, this was confirmed by analysing the market risk for each of the stocks after the Lehman Brothers bankruptcy. The results showed that the stock performance of each bank was more dependable on the overall market performance during the period after the crash. The Handelsbanken stock turned out to have the lowest degree of market risk followed by Nordea, Swedbank and SEB.