Using securities market information for bank supervisory monitoring
Abstract
Bank supervisors in the United States conduct comprehensive on-site inspections of bank holding companies (BHCs) and assign them a supervisory rating meant to summarize their overall condition. We develop an empirical forecasting model of these ratings that combines supervisory and securities market data. We find that securities market variables, such as BHC stock returns and bond yield spreads, improve the model’s in-sample fit. We also find that debt market variables provide more information on supervisory ratings for BHCs closer to default, while equity market variables provide more information for those further from default. In out-of sample forecasting, we find that the accuracy of the model with both equity and debt variables is little different from the accuracy of a model based on supervisory information alone. However, the model with securities market data identifies additional ratings downgrades, which supervisors would probably value enough to warrant the use of this extended model for off-site monitoring purposes.Download Info
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Paper provided by Federal Reserve Bank of San Francisco in its series Working Papers in Applied Economic Theory with number 2004-05.Length:
Date of creation: 2004
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Handle: RePEc:fip:fedfap:2004-05
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Related research
Keywords: Bank supervision ; Stock market ; Bond market ; Securities;Other versions of this item:
- John Krainer & Jose A. Lopez, 2008. "Using Securities Market Information for Bank Supervisory Monitoring," International Journal of Central Banking, International Journal of Central Banking, vol. 4(1), pages 125-164, March.
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-08-09 (All new papers)
- NEP-CBA-2004-08-09 (Central Banking)
- NEP-REG-2004-08-09 (Regulation)
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Citations
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.Cited by:
- Peresetsky, A. A., 2011. "What factors drive the Russian banks license withdrawal," MPRA Paper 41507, University Library of Munich, Germany.
- 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.
- Jérôme Coffinet & Adrian Pop & Muriel Tiesset, 2010. "Predicting Financial Distress in a High-Stress Financial World: The Role of Option Prices as Bank Risk Metrics," Working Papers hal-00547744, HAL.
- Greg Caldwell, 2007. "Best Instruments for Market Discipline in Banking," Working Papers 07-9, Bank of Canada.
- Martín Saldías, 2012.
"Systemic Risk Analysis using Forward-Looking Distance-to-Default Series,"
Working Papers
w201216, Banco de Portugal, Economics and Research Department.
- Martin Saldías Zambrana, 2010. "Systemic risk analysis using forward-looking distance-to-default series," Working Paper 1005, Federal Reserve Bank of Cleveland.
- Olivier BROSSARD (LEREPS-GRES ) & Frédéric DUCROZET (PSE - Crédit Agricole) & Adrian ROCHE (EconomiX - Crédit Agricole), 2007. "An Early Warning Model for EU banks with Detection of the Adverse Selection Effect," Cahiers du GRES 2007-08, Groupement de Recherches Economiques et Sociales.
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