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Federal Reserve interest rate hikes generate stronger positive abnormal stock returns for regional banks compared to large-cap banks, though regional bank valuations face a fragility discount during subsequent easing cycles due to persistent commercial real estate risks. Novelty: ClaimNovelty.CONFIRMATORY. Consensus alignment: ConsensusAlignment.SUPPORTS_CONSENSUS.

What question did this study set out to answer?

This research investigates how Federal Reserve interest rate decisions affect stock prices of regional versus large-cap banks.

June 8, 20260 citationsOpen Access

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Impact of Federal Reserve Monetary Policy Cycles on Regional versus Large-Cap Bank Stock Valuations: An Event Study (2022-2025)

AXAlan Xiao

Key Points

This research investigates how Federal Reserve interest rate decisions affect stock prices of regional versus large-cap banks.
Used event study approach during FOMC announcements as events.
Calculated abnormal returns (AR) and cumulative abnormal returns (CAR) using market and constant-mean return models.
Analyzed a -120 to -6 day pre-event period and a -5 to +5 day event window for significance.
Regional banks showed stronger positive ARs on announcement days (+0.82%) compared to large-cap banks (+0.10%).
Valuations for regional banks faced challenges with $337.1 billion in unrealized losses linked to commercial real estate concerns.
Interest rate shocks led to varying impacts on bank valuations, with tightening generally depressing risk assets.

Abstract

Background/Objective: The Federal Reserve's 525-basis-point tightening cycle (2022-2023) created a high-velocity stress test for the U.S. banking system. This paper uses an event study approach to investigate the impact of 2022-2025 interest rate decisions on the stock prices of selected regional banks (RF, FITB, KEY, HBAN) compared to large-cap banks (JPM, BAC, WFC, C). Methods: Official Federal Open Market Committee (FOMC) announcement dates were utilized as events 1. Abnormal returns (AR) and cumulative abnormal returns (CAR) were calculated against the S while tightening generally depresses risk assets 8, banks can be an exception 6. The 2025 easing cycle lacked perfect symmetry, as persistent CRE risks tempered valuation gains even as the Federal Reserve transitioned to rate cuts.

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Impact of Federal Reserve Monetary Policy Cycles on Regional versus Large-Cap Bank Stock Valuations: An Event Study (2022-2025)

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