The Olympia and York Crisis: Effects on the Financial Performance of US and Foreign Banks

Olympia and York (O&Y), the world′s largest privately held real estate developer, filed for bankruptcy in Canada, the US and the UK in May 1992. The study of O&Y′s impact on banks′ financial performance is important because its financial difficulties affected the banking industry significantly. Unlike studies testing how major lenders′ problems affect other US banks′ stock prices, the study is novel in that it tests how a major borrower′s problems affect both US and foreign banks′ stock prices. Analyses the reactions of US and foreign bank stocks and of O&Y′s bonds to its crisis; the capital market′s response is strongly negative. O&Y′s distress was a major event that signalled the real estate recession and investors′ concerns over the banking sector′s substantial exposure to non‐performing real estate loans. Its creditors applied increasing pressure on its management to disclose more financial information, to renegotiate loans, and eventually, to file for bankruptcy.