Since the global financial crisis, German and other European banks’ stocks have underperformed compared with the overall euro‐area stock market. Does this observation reflect the explicit state guarantee for too‐big‐to‐fail (TBTF) banks? In that case, investors have an incentive to hold stocks of systemically important banks because they provide insurance against disaster risk through the state guarantee. Indeed, recent studies reveal a TBTF discount in large US banks’ stock returns. Does this finding pertain to German (representing continental European) banks too? The main results of this paper suggest that it does. Risk‐adjusted returns on a German bank stock index were negative in the period from 1973 to 2014. The key driver of this finding is an unanticipated, adverse shock to the German banking sector at the beginning of the global financial crisis. This shock increased the probability of a bank default and thus the insurance value of government support.