from the New York Fed
What happens when States consider or enact pension cut legislation to the values of banks? We find that banks doing business in Wisconsin and Ohio experienced positive (negative) stock price reactions to announcements that indicate an increased (a decreased) probability of pension cut legislation. The stock price reactions are positively related to the extent to which banks operate in Wisconsin and Ohio.
Stock price reactions are rarely evident for banks in the other thirteen states that were considering pension cut legislation during the period of analysis. We also find municipal bond spreads tighten and bank credit supply increases with pension cut legislation. Overall, the findings suggest states’ budget cuts affect bank values and credit supply through their municipal bond holdings.