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Financial market signals and banking supervision: are current practices consistent with research findings?

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Author Info
Frederick T. Furlong
Robard Williams
Abstract

The trend toward incorporating information derived from financial markets into the bank supervision process has gained momentum over the past several years. This in part reflects an evolution in the thinking about how private market information can contribute to the process. In light of the evolving view of the potential contributions of market information, this paper reviews the empirical evidence relevant to the usefulness of financial market information in the bank supervision process. This paper reviews the research on what information can be gleaned from the pricing of equity and debt securities issued by banking organizations. The weight of the research leaves little room for doubt that financial market signals reflect underlying bank risk and that market evaluations of the risk of individual banking organizations are strongly correlated with supervisory findings. The evidence on the extent to which market signals can augment the information set of bank supervisors is more subtle, but overall it demonstrates that financial market signals should play a role in the bank supervision process.

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Publisher Info
Article provided by Federal Reserve Bank of San Francisco in its journal Economic Review.

Volume (Year): (2006)
Issue (Month): ()
Pages: 17-29
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Handle: RePEc:fip:fedfer:y:2006:p:17-29

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Related research
Keywords: Financial markets ; Bank supervision ; Gramm-Leach-Bliley Act;

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Frederick T. Furlong, 1988. "Changes in bank risk," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue Mar 25. [Downloadable!]
  2. Douglas D. Evanoff & Larry D. Wall, 2001. "Sub-debt yield spreads as bank risk measures," Working Paper Series WP-01-03, Federal Reserve Bank of Chicago. [Downloadable!]
    Other versions:
  3. Reint Gropp & Jukka Vesala, 2002. "Deposit insurance, moral hazard, and market monitoring," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 75-107.
    Other versions:
  4. Robert R. Bliss & Mark J. Flannery, 2000. "Market discipline in the governance of U.S. Bank Holding Companies: monitoring vs. influencing," Working Paper Series WP-00-3, Federal Reserve Bank of Chicago. [Downloadable!]
  5. Frederick T. Furlong, 1988. "Changes in bank risk-taking," Economic Review, Federal Reserve Bank of San Francisco, issue Spr, pages 45-56. [Downloadable!]
  6. Billett, Matthew T. & Garfinkel, Jon A. & O'Neal, Edward S., 1998. "The cost of market versus regulatory discipline in banking1," Journal of Financial Economics, Elsevier, vol. 48(3), pages 333-358, June. [Downloadable!] (restricted)
  7. Goyal, Vidhan K., 2005. "Market discipline of bank risk: Evidence from subordinated debt contracts," Journal of Financial Intermediation, Elsevier, vol. 14(3), pages 318-350, July. [Downloadable!] (restricted)
  8. Evanoff, Douglas D. & Wall, Larry D., 2002. "Measures of the riskiness of banking organizations: Subordinated debt yields, risk-based capital, and examination ratings," Journal of Banking & Finance, Elsevier, vol. 26(5), pages 989-1009, May. [Downloadable!] (restricted)
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  9. Allen Berger & Sally Davies, 1998. "The Information Content of Bank Examinations," Journal of Financial Services Research, Springer, vol. 14(2), pages 117-144, October. [Downloadable!] (restricted)
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  10. Julapa Jagtiani & Catharine Lemieux, 2000. "Market discipline prior to failure," Emerging Issues, Federal Reserve Bank of Chicago, issue Sep. [Downloadable!]
  11. Keeley, Michael C, 1990. "Deposit Insurance, Risk, and Market Power in Banking," American Economic Review, American Economic Association, vol. 80(5), pages 1183-1200, December. [Downloadable!] (restricted)
  12. Douglas D. Evanoff & Larry D. Wall, 2003. "Subordinated debt and prompt corrective regulatory action," Working Paper Series WP-03-03, Federal Reserve Bank of Chicago. [Downloadable!]
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  13. Ito, Takatoshi & Harada, Kimie, 2004. "Credit Derivatives Premium as a New Japan Premium," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(5), pages 965-68, October.
  14. 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.
  15. Ellis, David M. & Flannery, Mark J., 1992. "Does the debt market assess large banks, risk? : Time series evidence from money center CDs," Journal of Monetary Economics, Elsevier, vol. 30(3), pages 481-502, December. [Downloadable!] (restricted)
  16. Frederick T. Furlong & Michael C. Keeley, 1987. "Subordinated debt as bank capital," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue Oct 23. [Downloadable!]
  17. Hull, John & Predescu, Mirela & White, Alan, 2004. "The relationship between credit default swap spreads, bond yields, and credit rating announcements," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2789-2811, November. [Downloadable!] (restricted)
  18. John S. Jordan & Joe Peek & Eric S. Rosengren, 1999. "Impact of greater bank disclosure amidst a banking crisis," Working Papers 99-1, Federal Reserve Bank of Boston. [Downloadable!]
  19. Mark M. Spiegel & Nobuyoshi Yamori, 2003. "Determinants of voluntary bank disclosure: evidence from Japanese Shinkin banks," Pacific Basin Working Paper Series 03-03, Federal Reserve Bank of San Francisco. [Downloadable!]
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Fred Furlong & Simon Kwan, 2006. "Safe and sound banking, 20 years later: what was proposed and what has been adopted," Working Paper Series 2006-27, Federal Reserve Bank of San Francisco. [Downloadable!]
  2. Frederick T. Furlong & Simon Kwan, 2006. "Safe & sound banking, 20 years later: what was proposed and what has been adopted," Proceedings, Federal Reserve Bank of San Francisco. [Downloadable!]
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