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Comparing market and supervisory assessments of bank performance: who knows what when?

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  • Allen N. Berger
  • Sally M. Davies
  • Mark J. Flannery

Abstract

This paper compares the timeliness and accuracy of (confidential) government assessments of bank condition against market evaluations of large U.S. bank holding companies. We find that supervisors and bond rating agencies both acquire some information that would help the other group forecast changes in bank condition. In contrast, supervisory assessments and equity market indicators are not strongly interrelated. Furthermore, supervisory assessments are generally less accurate than either stock or bond market indicators in predicting future changes in performance, except when those assessments derive from a recent on-site inspection visit. To some extent, these findings seem consistent with the various parties' differing incentives.

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Bibliographic Info

Article provided by Federal Reserve Bank of Cleveland in its journal Proceedings.

Volume (Year): (2000)
Issue (Month): ()
Pages: 641-670

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Handle: RePEc:fip:fedcpr:y:2000:p:641-670

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Keywords: Bank supervision ; Bank holding companies ; Bank examination;

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References

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  1. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July.
  2. Rebel Cole & Jeffery Gunther, 1998. "Predicting Bank Failures: A Comparison of On- and Off-Site Monitoring Systems," Journal of Financial Services Research, Springer, vol. 13(2), pages 103-117, April.
  3. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
  4. Gary Whalen & James B. Thomson, 1988. "Using financial data to identify changes in bank condition," Economic Review, Federal Reserve Bank of Cleveland, issue Q II, pages 17-26.
  5. Mathias Dewatripont & Jean Tirole, 1994. "The prudential regulation of banks," ULB Institutional Repository 2013/9539, ULB -- Universite Libre de Bruxelles.
  6. Flannery, Mark J, 1998. "Using Market Information in Prudential Bank Supervision: A Review of the U.S. Empirical Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(3), pages 273-305, August.
  7. Holthausen, Robert W. & Leftwich, Richard W., 1986. "The effect of bond rating changes on common stock prices," Journal of Financial Economics, Elsevier, vol. 17(1), pages 57-89, September.
  8. 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, vol. 31(1), pages 14-34, February.
  9. Fama, Eugene F., 1976. "Forward rates as predictors of future spot rates," Journal of Financial Economics, Elsevier, vol. 3(4), pages 361-377, October.
  10. Pettway, Richard H., 1980. "Potential Insolvency, Market Efficiency, and Bank Regulation of Large Commercial Banks," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 15(01), pages 219-236, March.
  11. Katerina Simons & Stephen Cross, 1991. "Do capital markets predict problems in large commercial banks?," New England Economic Review, Federal Reserve Bank of Boston, issue May, pages 51-56.
  12. Allen N. Berger & Sally M. Davies, 1994. "The information content of bank examinations," Finance and Economics Discussion Series 94-20, Board of Governors of the Federal Reserve System (U.S.).
  13. Allen N. Berger & Sally M. Davies, 1994. "The information content of bank examinations," Proceedings 55, Federal Reserve Bank of Chicago.
  14. Hand, John R M & Holthausen, Robert W & Leftwich, Richard W, 1992. " The Effect of Bond Rating Agency Announcements on Bond and Stock Prices," Journal of Finance, American Finance Association, vol. 47(2), pages 733-52, June.
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