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Using Securities Market Information for Bank Supervisory Monitoring

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  • John Krainer

    (Economic Research Department, Federal Reserve Bank of San Francisco)

  • Jose A. Lopez

    (Economic Research Department, Federal Reserve Bank of San Francisco)

Abstract

U.S. bank supervisors conduct comprehensive inspections of bank holding companies and assign them a supervisory rating, known as a BOPEC rating prior to 2005, meant to summarize their overall condition. We develop an empirical model of these BOPEC ratings that combines supervisory and securities market information. Securities market variables, such as stock returns and bond yield spreads, improve the model's in-sample fit. Debt market variables provide more information on supervisory ratings for banks closer to default, while equity market variables provide useful information on ratings for banks further from default. The out-of-sample accuracy of the model with securities market variables is little different from that of a model based on supervisory variables alone. However, the model with securities market information identifies additional ratings downgrades, which are of particular importance to bank supervisors who are concerned with systemic risk and contagion.

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Bibliographic Info

Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 4 (2008)
Issue (Month): 1 (March)
Pages: 125-164

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Handle: RePEc:ijc:ijcjou:y:2008:q:1:a:4

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Cited by:
  1. Peresetsky, A. A., 2011. "What factors drive the Russian banks license withdrawal," MPRA Paper 41507, University Library of Munich, Germany.
  2. Peresetsky, Anatoly, 2013. "Modeling reasons for Russian bank license withdrawal: Unaccounted factors," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 30(2), pages 49-64.
  3. Coffinet, J. & Pop, A. & Tiesset, M., 2010. "Predicting Financial Distress in a High-Stress Financial World: The Role of Option Prices as Bank Risk Metrics," Working papers 311, Banque de France.
  4. Jérôme Coffinet & Adrian Pop & Muriel Tiesset, 2013. "Monitoring Financial Distress in a High-Stress Financial World: The Role of Option Prices as Bank Risk Metrics," Journal of Financial Services Research, Springer, vol. 44(3), pages 229-257, December.
  5. Saldías, Martín, 2013. "Systemic risk analysis using forward-looking Distance-to-Default series," Journal of Financial Stability, Elsevier, vol. 9(4), pages 498-517.
  6. Greg Caldwell, 2007. "Best Instruments for Market Discipline in Banking," Working Papers 07-9, Bank of Canada.

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