Learning banks' exposure to systematic risk: evidence from the financial crisis of 2008

Using a two‐state Markov regime‐switching intertemporal capital asset pricing model, we find that the exposure to systematic risk of bank stocks varies with size and the state of the economy. Across large banks, those with higher net interest margins and lower capital ratios are the most exposed to unexpected shifts in the term structure of interest rates. Small banks with higher net interest rate margins and that rely less on noninterest income are the most exposed to unexpected shifts in the stance of monetary policy. We apply the asset pricing model out of sample to assess its ability to detect troubled banks during a financial crisis.