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Pricing bank stocks: the contribution of bank examinations


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  • John S. Jordan
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    In the wake of recent studies concluding that financial markets effectively demand risk premia on noninsured bank securities, the debate has intensified over whether we should place greater reliance on markets and less reliance on direct regulatory oversight. This study contributes to the debate by investigating the interaction between the market's pricing of bank equity securities and the regulatory examination process during the early stages of New England's banking crisis in the late 1980s and early 1990s. It addresses the concern that reducing regulatory oversight may adversely affect the market's ability to price bank securities effectively. The author finds that the bank examination process contributed significantly to the market's understanding of financial problems at New England banks. Bank examiners appear to have uncovered problems that bank management was unwilling to disclose publicly., since accounting performance measures were significantly different in exam quarters that resulted in supervisory downgrades than they were in all other quarters. In addition, market participants appeared to find this information useful, driving down stock prices in the quarter after the exam, the period when the poor performance measures associated with the exam are generally disclosed. The author suggests caution in considering market discipline as a substitute for regulatory oversight; the results of his study suggests it should more appropriately be considered as a complement.

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    Bibliographic Info

    Article provided by Federal Reserve Bank of Boston in its journal New England Economic Review.

    Volume (Year): (1999)
    Issue (Month): May ()
    Pages: 39-53

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    Handle: RePEc:fip:fedbne:y:1999:i:may:p:39-53

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    Keywords: Bank stocks ; Bank examination;


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    1. Beverly J. Hirtle & Jose A. Lopez, 1999. "Supervisory information and the frequency of bank examinations," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Apr, pages 1-20.
    2. Donald P. Morgan, 1998. "Judging the risk of banks: what makes banks opaque?," Research Paper, Federal Reserve Bank of New York 9805, Federal Reserve Bank of New York.
    3. Flannery, Mark J & Houston, Joel F, 1999. "The Value of a Government Monitor for U.S. Banking Firms," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 31(1), pages 14-34, February.
    4. Allen Berger & Sally Davies, 1994. "The Information Content of Bank Examinations," Center for Financial Institutions Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania 94-24, Wharton School Center for Financial Institutions, University of Pennsylvania.
    5. Allen N. Berger & Sally M. Davies, 1994. "The information content of bank examinations," Proceedings, Federal Reserve Bank of Chicago 55, Federal Reserve Bank of Chicago.
    6. John S. Jordan & Joe Peek & Eric S. Rosengren, 1999. "Impact of greater bank disclosure amidst a banking crisis," Working Papers, Federal Reserve Bank of Boston 99-1, Federal Reserve Bank of Boston.
    7. Katerina Simons & Stephen Cross, 1991. "Do capital markets predict problems in large commercial banks?," New England Economic Review, Federal Reserve Bank of Boston, Federal Reserve Bank of Boston, issue May, pages 51-56.
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    Cited by:
    1. G.G. Kaufman, 2000. "Banking and Currency Crises and Systemic Risk: A Taxonomy and Review," DNB Staff Reports (discontinued), Netherlands Central Bank 48, Netherlands Central Bank.
    2. Linda Allen & Julapa Jagtiani & James Moser, 2001. "Further Evidence on the Information Content of Bank Examination Ratings: A Study of BHC-to-FHC Conversion Applications," Journal of Financial Services Research, Springer, Springer, vol. 20(2), pages 213-232, October.
    3. Allen N. Berger & Margaret K. Kyle & Joseph M. Scalise, 2000. "Did U.S. bank supervisors get tougher during the credit crunch? Did they get easier during the banking boom? Did it matter to bank lending?," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2000-39, Board of Governors of the Federal Reserve System (U.S.).


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