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The role of supervisory screens and econometric models in off-site surveillance

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  • R. Alton Gilbert
  • Andrew P. Meyer
  • Mark D. Vaughan

Abstract

Off-site surveillance involves using financial ratios to identify banks likely to develop safety-and-soundness problems. Bank supervisors use two tools to flag developing problems: supervisory screens and econometric models. Despite the statistical dominance of models, supervisors continue to rely heavily on screens. We use data from the 1980s and 1990s to compare, once again, the performance of the two approaches to off-site surveillance. Our study explicitly addresses supervisors' criticisms of econometric models. In particular, we offer a new econometric model - one designed to forecast downgrades in supervisory ratings - that is more forward-looking than existing models. As in earlier comparisons, econometric models consistently outperform supervisory screens for our sample. These results do not, however, suggest that screens should be dropped from the surveillance toolbox. When abrupt changes in the causes of bank failures and CAMEL downgrades occur, supervisors can modify their screens long before models can be revised to reflect the new conditions. We conclude that both screens and models add value in off-site surveillance, but that supervisors should rely more heavily on econometric models in the future than they have in the past.

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Bibliographic Info

Article provided by Federal Reserve Bank of St. Louis in its journal Review.

Volume (Year): (1999)
Issue (Month): Nov ()
Pages: 31-56

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Handle: RePEc:fip:fedlrv:y:1999:i:nov:p:31-56:n:v.81no.6

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Keywords: Econometric models ; Bank supervision;

References

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  1. Mark J. Flannery, 1982. "Deposit insurance creates a need for bank regulation," Business Review, Federal Reserve Bank of Philadelphia, Federal Reserve Bank of Philadelphia, issue Jan/Feb, pages 17-31.
  2. Belongia, Michael T. & Gilbert, R. Alton, 1989. "Effects Of Management Decisions On Agricultural Bank Failures," Proceedings: 1989 Regional Committee NC-161, October 2-3, 1989, St.Louis, Missouri, Regional Research Committee NC-1014: Agricultural and Rural Finance Markets in Transition 127409, Regional Research Committee NC-1014: Agricultural and Rural Finance Markets in Transition.
  3. Bernanke, Ben S, 1995. "The Macroeconomics of the Great Depression: A Comparative Approach," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 27(1), pages 1-28, February.
  4. Cannella Jr., Albert A. & Fraser, Donald R. & Lee, D. Scott, 1995. "Firm failure and managerial labor markets Evidence from Texas banking," Journal of Financial Economics, Elsevier, Elsevier, vol. 38(2), pages 185-210, June.
  5. Kevin L. Kliesen & R. Alton Gilbert, 1996. "Are some agricultural banks too agricultural?," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Jan, pages 23-36.
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Citations

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Cited by:
  1. Kolari, James & Glennon, Dennis & Shin, Hwan & Caputo, Michele, 2002. "Predicting large US commercial bank failures," Journal of Economics and Business, Elsevier, Elsevier, vol. 54(4), pages 361-387.
  2. Thomas B. King & Daniel A. Nuxoll & Timothy J. Yeager, 2006. "Are the causes of bank distress changing? can researchers keep up?," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Jan, pages 57-80.
  3. Julapa Jagtiani & James Kolari & Catharine Lemieux & Hwan Shin, 2003. "Early warning models for bank supervision: Simpler could be better," Economic Perspectives, Federal Reserve Bank of Chicago, Federal Reserve Bank of Chicago, issue Q III, pages 49-60.
  4. John S. Jordan & Eric S. Rosengren, 2002. "Economic cycles and bank health," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, Federal Reserve Bank of Boston.
  5. Douglas Evanoff & Larry Wall, 2001. "Sub-debt Yield Spreads as Bank Risk Measures," Journal of Financial Services Research, Springer, Springer, vol. 20(2), pages 121-145, October.
  6. Elosegui, Pedro Luis, 2003. "Aggregate risk, credit rationing and capital accumulation," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 43(4), pages 668-696.
  7. John R. Hall & Thomas B. King & Andrew P. Meyer & Mark D. Vaughan, 2002. "Do jumbo-CD holders care about anything?," Supervisory Policy Analysis Working Papers, Federal Reserve Bank of St. Louis 2002-05, Federal Reserve Bank of St. Louis.
  8. Reint Gropp & Jukka Vesala & Giuseppe Vulpes, 2002. "Equity and bond market signals as leading indicators of bank fragility," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, Federal Reserve Bank of Boston.
  9. R. Alton Gilbert & Andrew P. Meyer & Mark D. Vaughan, 2002. "Could a CAMELS downgrade model improve off-site surveillance?," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Jan., pages 47-63.
  10. R. Alton Gilbert & Andrew P. Meyer & Mark D. Vaughan, 2000. "The role of a CAMEL downgrade model in bank surveillance," Working Papers, Federal Reserve Bank of St. Louis 2000-021, Federal Reserve Bank of St. Louis.

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