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On credit spread slopes and predicting bank risk

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  • C. N. V. Krishnan
  • Peter H. Ritchken
  • James B. Thomson

Abstract

The authors examine whether credit-spread curves, engendered by a mandatory subordinated-debt requirement for banks, would help predict bank risk. They extract the credit-spread curves each quarter for each bank in our sample, and analyze the information content of credit-spread slopes. They find that credit-spread slopes are significant predictors of future credit spreads. However, credit-spread slopes do not provide significant additional information on future bank-risk variables, over and above other bank-specific and market-wide information.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 0314.

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Date of creation: 2003
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Handle: RePEc:fip:fedcwp:0314

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Keywords: Bank capital ; Risk;

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  17. Pierre Collin-Dufresne, 2001. "The Determinants of Credit Spread Changes," Journal of Finance, American Finance Association, vol. 56(6), pages 2177-2207, December.
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  19. C. N. V. Krishnan & P. H. Ritchken & J. B. Thomson, 2005. "Monitoring and Controlling Bank Risk: Does Risky Debt Help?," Journal of Finance, American Finance Association, vol. 60(1), pages 343-378, 02.
  20. Patrick Houweling & Albert Mentink & Ton Vorst, 2003. "How to measure Corporate Bond Liquidity?," Tinbergen Institute Discussion Papers 03-030/2, Tinbergen Institute.
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Citations

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Cited by:
  1. Evanoff, Douglas D. & Jagtiani, Julapa A. & Nakata, Taisuke, 2011. "Enhancing market discipline in banking: The role of subordinated debt in financial regulatory reform," Journal of Economics and Business, Elsevier, vol. 63(1), pages 1-22.
  2. Adrian Pop, 2009. "Beyond the Third Pillar of Basel Two: Taking Bond Market Signals Seriously," Working Papers hal-00419241, HAL.
  3. Kedia, Simi & Zhou, Xing, 2014. "Informed trading around acquisitions: Evidence from corporate bonds," Journal of Financial Markets, Elsevier, vol. 18(C), pages 182-205.
  4. Krishnan, C.N.V. & Ergungor, O. Emre & Laux, Paul A. & Singh, Ajai K. & Zebedee, Allan A., 2010. "Examining bank SEOs: Are offers made by undercapitalized banks different?," Journal of Financial Intermediation, Elsevier, vol. 19(2), pages 207-234, April.
  5. Krishnan, C.N.V. & Ritchken, Peter H. & Thomson, James B., 2010. "Predicting credit spreads," Journal of Financial Intermediation, Elsevier, vol. 19(4), pages 529-563, October.
  6. C.N.V. Krishnan & Peter H. Ritchken & James B. Thomson, 2007. "On forecasting the term structure of credit spreads," Working Paper 0705, Federal Reserve Bank of Cleveland.

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