If it seems that bank stocks are more volatile now than in the past, there's a reason.
An American Banker survey of trading trends confirms that stocks in general are moving in wider arcs than during the 1980s and that bank stocks have become even more changeable than the shares of other companies in the Standard & Poor's 500 stock index.
"There is definitely more play in these stocks," said John D. Rooney Jr., a veteran analyst and money manager at Legg Mason Inc. in New Haven, Conn.
The 29 companies in the S&P bank index, tracked as a group, are statistically likely to gain 13.7% more than other stocks in a rising market and to suffer losses that much deeper in a falling market.
The average beta coefficient, or relative volatility, of the S&P banks was 1.137 over the past two years, versus 0.974 in the 1991-93 period. Since the S&P 500's own beta is always 1.0, this means banks have gone from being slightly less jumpy than most stocks at the beginning of the decade to noticeably more volatile.
The bulk of the increased volatility appears to reflect higher risks attached by investors to bank stocks themselves, rather than overall market risk.
It is a significant shift, and there are a host of reasons for it, analysts and observers say.
Industry deregulation and consolidation and the related expansion of bank share ownership to momentum-oriented investors have been major forces. Changes in accounting standards and sharper moves in interest rates have also played a part.
Risks in the globalized financial system are an additional factor, as last year's huge swing in bank stock valuations demonstrated after Russia's default.
Legg Mason's Mr. Rooney noted that much of the volatility is in shares of major banks, and he said it is probably linked in part to acquisition activity, as well as to the high profile of bank stocks in recent years.
"It's obvious that investors have become very wary of the (earnings) impact of acquisitions," he said. "And under the new financial deregulation, banks are definitely going to be the acquirers." In addition, entry of the major banking companies into investment banking has tied them to the fortunes of global financial markets.
"The banks have wanted capital markets-related income," said industry analyst Nancy A. Bush of Ryan, Beck & Co. in Livingston, N.J. "What comes with that is capital markets-related headaches, and the result is more volatile stocks. Bank earnings streams aren't as safe and predictable as they used to be."
Mr. Rooney noted the substantial 52-week trading ranges of some major banking stocks. Bank One Corp., for instance, which has issued several earnings warnings, has traded as high as $63.5625 and as low as $32.625.
In the realm of volatility, banks have been market leaders since 1993. Before then, volatility in bank equities was trending downward along with the broad-market S&P 500 and the blue-chip Dow Jones industrial average.
Subsequently, however, banks' volatility soared and has remained well above the market's own higher level of volatility. Indeed, the gap widened over the past year.
The trend can be seen in a study of historical volatility over this decade, looking at the standard deviation of closing values of the S&P 500, S&P banks, and the Dow industrials.
Standard deviation is a statistical concept that gauges how far values tend to be dispersed from the average. When a stock or stock index has a high standard deviation, the predictable range of performance is wide, implying greater volatility.
In 1990, with the economy moving into recession, the S&P 500 deviated from its statistical average level about 18.9% of the time. The market's volatility level then fell steadily to 10.2% in 1995 as the economy recovered and then began growing again. Last year the volatility level was 24.75%, and this year, through Nov. 2, it surpassed 25%.
The Dow industrials have closely tracked the volatility level of the S&P 500, which has long been considered the standard proxy for the overall market. The Dow's volatility level fell from 19.6% in 1990 to 11.3% in 1995, rose to 24.6% last year, but slipped to 23.6% this year through Nov. 2.
It is not surprising that the Dow, with 30 stocks, is often a few degrees more volatile than the 500 stocks of the S&P index.
By contrast, however, the S&P bank index, with 29 stocks, has become substantially more volatile. From a volatility level of 21.6% in 1990 -- the year it was created -- the index's deviation slipped to 10.5% in 1993 -- less trading volatility than either the S&P 500 or the Dow.
Then in 1994, as the Federal Reserve steadily raised interest rates to head off inflation, bank stock volatility soared to 17.1%. After leveling out in 1995, volatility took off again, jumping to 20.2% in 1996 and then 35.4% last year and 38.2% this year through Nov. 2.
The higher volatility relative to the market reflects risks that are specific to banks themselves.
In other words, bank stocks once tended to carry potential risks or rewards not much greater than the market itself -- sometimes a bit less. Now investors must weigh the prospect of a big premium against the peril of a sizable decline in value.